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NORTH
CAROLINA
COMPREHENSIVE
ANNUAL
FINANCIAL
REPORT
FOR THE FISCAL YEAR
ENDED JUNE 30, 2004
MICHAEL F. EASLEY
GOVERNOR
ROBERT L. POWELL
STATE CONTROLLER
Prepared by Statewide Accounting Division
Office of the State Controller
http:// www. ncosc. net/
2 State of North Carolina
This report was prepared by the
Statewide Accounting Division of the North Carolina Office of the State Controller.
John Barfield, CPA
ASSISTANT STATE CONTROLLER
jbarfield@ ncosc. net
Anne Godwin, CPA
Statewide Accounting and Financial Reporting Manager
agodwin@ ncosc. net
Amber Young
Central Compliance Manager
ayoung@ ncosc. net
Statewide Accounting Division Staff
Robert Alford, CPA Martha Hunt, CPA Cindy Salgado, CPA
Ann Anderson Cathy Johnson Melody Tart
Angela Clark Darlene Langston, CPA Shirley Trollinger
John Eliadis Michelle Lassiter Cynthia Vincent
Pam Fowler, CPA Clayton Murphy, CPA Helen Vozzo, CPA
Luke Harris Terri Noblin, CPA Virginia Warren
Special appreciation is given to the chief fiscal officers and the dedicated accounting personnel throughout the State.
Their efforts to contribute accurate and timely financial data for their agencies, universities, community colleges, and
institutions made this report possible.
State of North Carolina 3
MICHAEL F. EASLEY
Governor of North Carolina
4 State of North Carolina
TABLE OF CONTENTS
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2004
INTRODUCTORY SECTION
Letter of Transmittal.................................................................................................................... ............................................................................................ 8
Certificate of Achievement for Excellence in Financial Reporting...................................................................................................................... ................... 19
Organization of North Carolina State Government, including principal State officials........................................................................................................... 20
FINANCIAL SECTION
Report of Independent Auditor........................................................................................................................ ........................................................................ 24
Management's Discussion and Analysis....................................................................................................................... ........................................................... 28
Basic Financial Statements
Government- wide Financial Statements
Statement of Net Assets — Exhibit A- 1.............................................................................................................................. .................................................... 52
Statement of Activities — Exhibit A- 2.............................................................................................................................. ..................................................... 54
Fund Financial Statements
Balance Sheet— Governmental Funds — Exhibit B- 1.............................................................................................................................. ............................... 58
Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Exhibit B- 1a............................................................................ 59
Statement of Revenues, Expenditures, and Changes in Fund Balances— Governmental Funds — Exhibit B- 2...................................................................... 60
Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances
of Governmental Funds to the Statement of Activities — Exhibit B- 2a........................................................................................................................... 61
Statement of Net Assets— Proprietary Funds — Exhibit B- 3.............................................................................................................................. ................... 62
Statement of Revenues, Expenses, and Changes in Fund Net Assets— Proprietary Funds — Exhibit B- 4.............................................................................. 63
Statement of Cash Flows— Proprietary Funds — Exhibit B- 5.............................................................................................................................. .................. 64
Statement of Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 6.............................................................................................................................. ...... 66
Statement of Changes in Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 7............................................................................................................. 67
Notes to the Financial Statements..................................................................................................................... ....................................................................... 70
Required Supplementary Information
Schedules of Funding Progress— All Defined Benefit Pension Trust Funds.......................................................................................................................... 150
Schedule of Contributions from the Employers and Other Contributing Entities— All Defined Benefit Pension Trust Funds.............................................. 151
Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances— Budget and Actual
—( Budgetary Basis— Non- GAAP) General Fund........................................................................................................................... ................................ 152
Notes to Required Supplementary Information— Budgetary Reporting...................................................................................................................... ............ 153
Combining Fund Statements and Schedules
Nonmajor Governmental Funds
Combining Balance Sheet— Nonmajor Governmental Funds — Exhibit C- 1.......................................................................................................................... 160
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Governmental Funds — Exhibit C- 2.................................. 161
Combining Balance Sheet— Nonmajor Special Revenue Funds — Exhibit C- 3...................................................................................................................... 164
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Special Revenue Funds — Exhibit C- 4.............................. 168
Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances
— Budget and Actual ( Budgetary Basis— Non- GAAP) Nonmajor Special Revenue Funds — Exhibit C- 5................................................................ 172
Combining Balance Sheet— Nonmajor Capital Projects Funds — Exhibit C- 6....................................................................................................................... 178
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Capital Projects Funds — Exhibit C- 7............................... 179
Combining Balance Sheet— Nonmajor Permanent Funds — Exhibit C- 8.............................................................................................................................. 182
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Permanent Funds — Exhibit C- 9....................................... 183
Proprietary Funds
Nonmajor Enterprise Funds
Combining Statement of Net Assets— Nonmajor Enterprise Funds — Exhibit D- 1................................................................................................................ 188
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Nonmajor Enterprise Funds — Exhibit D- 2........................................... 189
Combining Statement of Cash Flows— Nonmajor Enterprise Funds — Exhibit D- 3.............................................................................................................. 190
Internal Service Funds
Combining Statement of Net Assets— Internal Service Funds — Exhibit E- 1......................................................................................................................... 192
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Internal Service Funds — Exhibit E- 2.................................................... 194
Combining Statement of Cash Flows— Internal Service Funds — Exhibit E- 3....................................................................................................................... 196
Fiduciary Funds
Combining Statement of Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 1............................................................................................... 202
Combining Statement of Changes in Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 2....................................................................... 203
Combining Statement of Changes in Assets and Liabilities— Agency Funds — Exhibit F- 3.................................................................................................. 206
State of North Carolina 5
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2004
Nonmajor Component Units - Discretely Presented
Combining Statement of Net Assets— Nonmajor Component Units — Exhibit G- 1............................................................................................................... 212
Combining Statement of Activities— Nonmajor Component Units — Exhibit G- 2................................................................................................................ 213
STATISTICAL SECTION
Revenues by Source and Expenditures by Function— All Governmental Fund Types ( GAAP Basis) — Table 1................................................................... 216
Schedule of Revenues by Source— General Fund ( GAAP Basis) — Table 2.......................................................................................................................... 218
General Obligation Bonds Debt Ratios — Table 3.............................................................................................................................. .................................... 220
Revenue Bond Coverage — Table 4.............................................................................................................................. .......................................................... 221
Schedule of General Obligation Bonds Payable — Table 5.............................................................................................................................. ...................... 222
Schedule of Special Obligation Debt — Table 6.............................................................................................................................. ....................................... 228
Statewide Assessed Property Values— Real Property, Tangible Personal Property and Public Service Companies — Table 7............................................. 229
Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina — Table 8............................................................... 230
Cash Receipts from Farming by Commodities — Table 9.............................................................................................................................. ........................ 231
Major Private Employers in North Carolina — Table 10............................................................................................................................. ........................... 232
Schedule of Demographic Data — Table 11............................................................................................................................. .............................................. 234
Ten Largest Non- Agricultural Industries by Number of Employees — Table 12.................................................................................................................... 236
Total Number of State Government Permanent Positions Funded in the State Budget by Agency — Table 13...................................................................... 237
Required Supplementary Information— Ten- Year Claims Development Information — Public School Insurance Fund — Table 14................................... 238
Schedule of Miscellaneous Statistics — Table 15............................................................................................................................. ...................................... 240
6 State of North Carolina
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INTRODUCTORY
SECTION
State of North Carolina
Office of the State Controller
Michael F. Easley, Governor Robert L. Powell, State Controller
MAILING ADDRESS
1410 Mail Service Center
Raleigh, NC 27699- 1410
Telephone: ( 919) 981- 5454
Fax Number: ( 919) 981- 5567
State Courier: 56- 50- 10
LOCATION
3512 Bush Street
Raleigh, NC
Website: www. ncosc. net
An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer
The Honorable Michael F. Easley, Governor
Members of the North Carolina General Assembly
Citizens of North Carolina
It is our pleasure to furnish you with the 2004 Comprehensive Annual Financial Report ( CAFR) of the State of North
Carolina in compliance with G. S. 143B- 426.39. This report has been prepared by the Office of the State Controller.
Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclo-sures,
rests with the State government and this office. To the best of our knowledge and belief, this financial report is
complete and reliable in all material respects. We believe all disclosures necessary to enable you to gain an understanding of
the State's financial activities have been included.
Although the State budgets and manages its financial affairs on the cash basis of accounting, G. S. 143- 20.1 requires the
Office of the State Controller to prepare a comprehensive annual financial report ( CAFR) in accordance with generally
accepted accounting principles in the United States of America ( GAAP). Except for exhibits and notes clearly labeled
otherwise, this CAFR has been prepared in accordance with GAAP.
For the convenience of users we have divided this comprehensive annual financial report into three major sections,
described as follows:
• The introductory section includes this transmittal letter and the State's organization chart, including a listing of principal
State officials.
• The financial section includes management discussion and analysis, the basic financial statements ( government- wide
financial statements, fund financial statements, and notes), other required supplementary information, the combining and
individual fund financial statements, and schedules.
• The statistical section includes selected financial, non- financial and demographic information, much of which is
presented on a ten- year basis, as well as required supplementary information.
Management of the government is responsible for establishing and maintaining an internal control structure designed to
ensure that the assets of the State are protected from loss, theft or misuse and to ensure that adequate accounting data are
compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The
internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The
concept of reasonable assurance recognizes that: ( 1) the cost of a control should not exceed the benefits likely to be derived,
and ( 2) the valuation of costs and benefits requires estimates and judgments by management.
GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and
Local Governments, requires that management provide a narrative introduction, overview and analysis to accompany the Basic
Financial Statements in the form of management discussion and analysis ( MD& A). This letter of transmittal is intended to
complement MD& A and should be read in conjunction with it. The MD& A can be found immediately following the
Independent Auditor’s Report.
State of North Carolina 9
Profile of the Government
The State of North Carolina entity as reported in the CAFR includes all fund types of the
departments, agencies, boards, commissions and authorities governed and legally controlled by
the State's executive, legislative and judicial branches. In addition, the reporting entity includes
legally separate component units for which the State is financially accountable. The component
units are discretely presented in the government- wide financial statements. The State's
discretely presented major component units are the University of North Carolina System; the
State's community colleges; Golden LEAF, North Carolina Housing Finance Agency, and North
Carolina State Education Assistance Authority. The criteria for inclusion in the reporting entity
and its presentation are defined by the Governmental Accounting Standards Board ( GASB) in
its GASB Codification Section 2100. These criteria are described in Note 1 of the
accompanying financial statements.
The State and its component units provide a broad range of services to its citizens,
including public education; higher education; health and human services; economic
development; environment and natural resources; public safety, corrections, and regulation;
transportation; agriculture; and general government services. The costs of these services are
reflected in detail and in summary in this report.
In addition to internal controls discussed previously, the State maintains budgetary
controls. The objective of these budgetary controls is to ensure compliance with legal
provisions embodied in the annual appropriated budget approved by the General Assembly.
Activities of the General Fund and most departmental special revenue funds are included in the
annual appropriated budget. The State Highway Fund and the Highway Trust Fund, the State's
major special revenue funds, are primarily budgeted on a multi- year basis. Capital projects are
funded and planned in accordance with the time it will take to complete the project. The level of
budgetary control ( that is, the level at which expenditures cannot legally exceed the appropriated
amount) is exercised at both the departmental and university level by way of quarterly
allotments, with allotment control exercised by the State Controller, and on the program line-item
levels requiring certain approvals by the Director of the Budget. Legislative authorization
of departmental expenditures appears in the State Appropriation Bill. This " Certified Budget" is
the legal expenditure authority; however, the Office of State Budget and Management ( OSBM)
may approve executive changes to the legal budget as allowed by law. This results in the " Final
Budget" presented in the required supplementary information.
State Reporting
Entity and
Its Services
Budgetary
Control
10 State of North Carolina
Economic Condition and Outlook
After experiencing robust growth during the first half of the 2004 calendar year, the
nation’s economy is now working through what is commonly referred to as a “ soft patch”. This
weakness is due to a combination of record energy prices ( in actual dollars) and periodic
warnings of potential terrorist activity. An additional issue has to do with the fact that the
stimulus from three federal tax packages enacted in recent years is starting to run out.
2001- 02 2002- 03 2003- 04 2004- 05
Actual Actual Actual Projected
U. S. INDICATORS
Real Economic Growth* 0.8% 2.3% 4.4% 3.5%
Nonfarm Employment - 1.0% - 0.6% 0.2% 1.7%
Personal Income 2.0% 2.1% 4.7% 4.9%
Industrial Production - 3.5% 0.5% 2.4% 4.4%
Corporate Profits ( Pre- Tax) - 8.6% 17.3% 15.2% 12.1%
Short- Term Interest Rates
( Actual Rate) 2.3% 1.4% 1.0% 2.0%
Mortgage Rates ( Actual Rate) 6.9% 6.0% 5.7% 6.1%
Inflation ( CPI) 1.8% 2.2% 2.2% 2.5%
* Adjusted for inflation.
It will be interesting to see how the current weakness affects the speed with which the
Federal Reserve ratchets up interest rates. As recently as last winter many observers felt that the
tenuous nature of the recovery would eliminate any rate hikes during 2004. Fed officials even
confirmed this operating strategy in unusually candid public remarks.
However, strong growth during the first few months of the year led to a re- examination of
the position last spring. After raising the benchmark federal funds rate from .75% to 1% on
June 30 and to 1.25% in August, the Federal Reserve is now signaling additional rate hikes will
take place at a “ measured” pace. The message to be gleaned from the Fed’s language is that
future actions will depend on how the economic data falls out. The recent weakness may cause
monetary officials to hold off on the anticipated September increase, especially in light of their
pronouncements about the impact of high energy prices.
In any case, the die has been cast and rates will rise over the next couple of years. During
the 1994 tightening, short term borrowing rates rose from 3% to 6% in a 13- month period.
Economy. com, the forecasting firm used by Fiscal Research, expects the rates to rise to 2.0% by
the first quarter of 2005 and to top out at 5.0% during the first quarter of 2007. The forecasting
firm used by the Office of State Budget and Management, Global Insight Inc., is also expecting
a 2.0% rate by the end of this year, rising to 3.5% by 2006.
National
Economic
Outlook
State of North Carolina 11
A continuing problem for the economy is the subpar recovery in jobs. This is due to a
combination of the movement of jobs overseas and the reticence of employers to ramp up
staffing levels in an atmosphere of uncertainty. North Carolina is on the front line of this shift,
due in part to NAFTA. This impact had begun well before the 2001 recession, as shown by the
job growth data below:
N. C. Employment Growth
In Selected Major Sectors
Year Manufacturing Finance Services
1994 0.5% 1.2% 7.6%
1995 0.5% 1.9% 4.5%
1996 - 1.7% 8.2% 4.5%
1997 - 1.0% 7.4% 5.7%
1998 - 0.5% 5.3% 6.0%
1999 - 2.5% - 0.4% 6.0%
2000 - 2.4% 0.7% 3.3%
2001 - 7.1% 4.6% 1.4%
2002 - 8.6% .7% 1.1%
2003 - 6.1% 1.5% .7%
A second issue has to do with the impact of higher energy prices on consumer spending.
From late winter 1999 to early summer 1999, gas prices in North Carolina rose from around 80
cents per gallon to $ 1.00, and to $ 1.25 by early 2000. Once motorists realized that the increase
might be more than a temporary spike, they cut back on purchases of other items ( except for
vehicles).
One way to measure this impact is to look at gross state and local sales tax collections.
After rising 8.6% for the second quarter of 1999, the rate of increase fell to 6.3% for the third
quarter, 5.4% for the fourth quarter, and to 4.5% by the first quarter of 2000. This problem was
compounded by the fact that heavy promotional activity by auto dealers propped up car sales.
The net result of these factors meant that the additional dollars going to vehicle purchases and
energy costs “ crowded out” spending on other items.
So far the impact of higher energy prices in 2004 on the overall economy and retail sales
has been muted. For one thing, the recovery in equity prices has enhanced the “ paper wealth” of
many investors. In addition, the substitution of natural gas and other energy sources for fuel oil
has minimized the impact of higher fuel prices on manufacturing production costs and family
budgets. A third factor is the cash received by homeowners who have refinanced their
mortgages.
A concern is that financing for retail activity may be coming from additional credit card
usage and such levels cannot be sustained indefinitely. A measure of this issue is the fact that
unlike the 1992- 94 recovery, sales tax collections are growing much faster than withholding tax
receipts.
Due to this concern and the phase out of the impact of the 2001- 03 federal tax cuts, the
underlying national economic assumptions used in the budget reflect the expectation that growth
will slow during the 2004- 05 fiscal years.
One of the primary characteristics of the 2001 recession was the impact on the
manufacturing sector. This is important to North Carolina because 15% of our nonagricultural
employment is in manufacturing versus 11% for the U. S. A more important measure is the
share of Gross State Product represented by manufacturing: 21% in North Carolina versus 16%
for the nation.
State
Prospects
12 State of North Carolina
The loss of manufacturing jobs did not begin with the 2001 recession. Data compiled by
the Employment Security Commission indicate that manufacturing experienced a fairly rapid
recovery from the 1990- 91 recession, with employment growth of 2.6% in 1993. In fact, the
“ boom and bust” nature of manufacturing is one reason why the state’s economy grew 33%
faster than the national experience following the 1981- 82 recession and 45% quicker following
the Gulf War downturn. Expressed another way, North Carolina was the fifth fastest growing
state during the 1992- 93 period in terms of personal income, due in part to the recovery in
manufacturing.
After a leveling off period, manufacturing employment began a steady decline in mid- 1995
due to the mild national economic slowdown and the kicking in of NAFTA. The rate of decline
began to accelerate in February 2001 and peaked at an 8.6% rate in 2002. Particularly hard hit
were the textile and apparel sectors, with North Carolina jobs in these sectors dropping over
15% on a year- over- year basis by the spring of 2001. While the rate of decline has slowed due
to the start of the economic recovery, the erosion continues. The only saving grace is that the
loss of traditional jobs has been so great that these sectors exert a much smaller impact on the
overall economy than in the past.
For the 2004- 05 fiscal year, we are budgeting on the basis of a continued subpar economic
recovery in North Carolina, both in terms of the absolute level and the normal growth premium
relative to the U. S. This experience would be very different from the explosive growth in the
state’s economy during the last two recoveries.
2001- 02 2002- 03 2003- 04 2004- 05
Actual Actual Actual Projected
NORTH CAROLINA INDICATORS
Personal Income 2.2% 2.3% 5.2% 5.5%
Nonfarm Employment - 2.1% - 1.1% 0.1% 2.1%
Unemployment Rate ( Actual Rate) 6.5% 6.5% 6.0% 5.4%
Average Hourly Earnings
( Manufacturing) 2.6% 2.6% 4.4% 3.2%
Retail Sales 2.5% 1.1% 6.7% 3.9%
Housing Activity 7.3% 6.1% 17.0% - 14.3%
Auto Sales - 5.5% - 1.4% 8.5% - 10.9%
— Economic analysis prepared by David Crotts
Fiscal Research Division
North Carolina General Assembly
October 29, 2004
Issues and Observations
During fiscal year 2004, the Governor, the General Assembly, and the departments and
agencies of State government worked to address key issues facing State government and the
citizens of North Carolina. More discussion of the financial issues of North Carolina can be
found in the Management’s Discussion and Analysis ( MD& A) section of this document.
Rising healthcare costs continue to be a concern throughout the State and the nation.
Healthcare costs impact State budget programs through increasing expenses not only in
Medicaid, but also in other State and federal healthcare programs. In recent years, adjustments
have been made to deductibles, co- payments, and benefits coverage under the State Health Plan
in an attempt to slow the growth of State budget healthcare costs.
Other Post-
Employment
Benefits
State of North Carolina 13
In light of the current and future concerns related to rising healthcare costs, the
Governmental Accounting Standards Board ( GASB) has been working on the issuance of
accounting and reporting standards for other post- employment benefits since the mid- 90’ s. In
April 2004, GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit
Plans Other Than Pension Plans ( effective for fiscal year 2006- 07), and in June 2004, GASB
issued Statement No. 45, Accounting and Financial Reporting by Employers for
Postemployment Benefits Other Than Pensions ( effective for fiscal year 2007- 08).
These new standards will require governmental employers to start accounting for the cost
of certain post employment benefits while employees are still working. Public sector employers
already accrue the cost of pensions as employees are working. These new standards will have a
significant impact for most state and local governments. In addition to pensions, many state and
local governmental employers provide other postemployment benefits ( OPEB) as part of the
total compensation offered to attract and retain the services of qualified employees. The cost of
these future benefits is a part of the cost of providing public services today. OPEB includes
postemployment healthcare, as well as other forms of postemployment benefits, such as life
insurance and disability. Currently, the State and most other governmental employers finance
OPEB plans on a pay- as- you- go basis. The financial statements generally do not report financial
effects of OPEB until the promised benefits are paid, often many years after the related
employee services are received.
These new GASB standards will improve the relevance and usefulness of financial
reporting by ( a) requiring systematic, accrual- basis measurement and recognition of OPEB cost
( expense) over a period that approximates employees’ years of service, and ( b) providing
information about actuarial accrued liabilities associated with OPEB and whether and to what
extent progress is being made in funding the plan. In addition, the proposed accounting change
would provide information useful in assessing potential demands on the employer’s future cash
flows.
In preparation for the implementation of these new standards, the General Assembly
through the 2004 Appropriations Act established the Retiree Health Benefit Trust Fund to hold
accumulated contributions from employers and any earnings on those contributions shall be
used to provide health benefits to retired and disabled employees and their applicable
beneficiaries. Employer contributions to the Fund are irrevocable. The assets of the Fund are
dedicated to providing health benefits to retired and disabled employees and their applicable
beneficiaries and are not subject to the claims of creditors of the employers making
contributions.
Three actuarial studies related to retiree healthcare have been completed as the State has
worked to get its hands around the issue and how to deal with it. Each of the three studies,
beginning in 1996, have reflected a substantial liability related to the State’s commitment to
provide healthcare to teacher and state employee retirees. The unfunded actuarial liability has
grown based on two formal studies from $ 5.4 billion in 1996, to $ 8.1 billion in 1999. More
recently, based on an informal estimate, the unfunded accrued liability may be in excess of $ 10
billion in 2004. This informal study does not reflect any changes that may arise in 2006 due to
the “ Medicare Prescription Drug, Improvements, and Modernization Act of 2003”.
Beginning in fiscal year 2006- 07, the actuarial data will be disclosed in the notes to the
State CAFR and will also be presented as Required Supplementary Information ( RSI). The
unfunded actuarial liability will not be recorded as an accounting liability but will be disclosed
in the notes to the financial statements, and as required supplementary information.
Beginning with the 2008 CAFR, the difference between the State’s contractual requirement
and the amount the State contributes or pays for retiree medical benefits will be recorded as an
accounting liability on the State’s government- wide financial statements.
14 State of North Carolina
The State’s largest OPEB plan, the Retiree Health Care Plan, is currently being funded on
a pay- as- you- go basis, resulting in a significant unfunded actuarial liability. The principal results
of the Plan’s most recent actuarial valuation are as follows:
Because the GASB’s proposed guidance on OPEB will significantly impact the State’s CAFR,
we have the following recommendations:
• The State needs to obtain an actuarial valuation for the retiree health plan at least
biennially. Annual valuations would be preferable for a state of our size, due to the
potential impact on teachers and state employees.
• On a prospective basis, the State should consider the long- term impact of the current
benefits structure as well as potential changes to that structure.
The 2004 General Assembly dedicated considerable time and effort into the evaluation of
current information technology management, organization, and operations at the statewide and
agency levels for North Carolina State government. The result of that evaluation was legislation
enacted in Senate Bill 991 that overhauled information technology authority by transferring it
from a central management committee to the Chief Information Officer for the State.
Senate Bill 991 provides for the abolishment of the Information Resources Management
Committee, the heretofore approval and oversight group for IT projects, and consolidated all
functions under the Chief Information Officer. These functions include:
• Responsibility for the review, approval and management of all IT
projects above an established threshold;
• The authority to proceed with an enterprise approach for
procurement of IT products and services and the authority to
implement such solutions;
• The responsibility for review and approval of all agency IT plans
and the development of a biennial State Information Technology
Plan for submission to the General Assembly;
• An assessment of the IT inventory throughout State government
and an assessment of the IT deficiencies along with a five year
plan for unmet needs;
• The creation of an Information Technology Fund that may be
used to meet statewide enterprise needs as approved by the
General Assembly; and
• The authority to establish IT standards statewide.
In short, the General Assembly adopted the proposal of the Governor to bring the management,
oversight and operations of information technology under the direct control of the Governor.
Included in Senate Bill 991 is the continuation of the State Business Infrastructure Program
( SBIP) that has been in progress since 2002. This project was authorized by the 2002 General
Assembly to evaluate the State’s core business functions and report back to the General
Assembly with an assessment and plan to address deficiencies. This activity occurred in two
phases that included an inventory and assessment, followed by a blueprint for addressing
priority deficiencies. The final report was presented to the 2004 General Assembly and funding
was authorized under Senate Bill 991 to proceed with the development of business requirements
for the most “ at risk” component of the study, Human Resources and Payroll ( HR/ Payroll).
Under the guidance of the Office of the State Controller, and in collaboration with the
State Personnel Officer, Chief Information Officer, and Deputy State Budget Officer, the
business development phase for HR/ Payroll is currently underway. This process is scheduled to
be completed by late Spring, at which time an RFP will be developed and the General Assembly
will be asked to consider funding for the implementation phase of this component of the SBIP.
Information
Technology
State of North Carolina 15
If funding is approved, the HR/ Payroll implementation will begin by late 2005 with an expected
implementation period of between 18 to 24 months.
Concurrent with this is the next phase of the SBIP, the development of a statewide data
warehouse for consolidation of information for use by state managers. The SBIP Program
Steering Committee will be considering a plan for moving forward with this component of the
SBIP within the next thirty to sixty days. Depending on the development plan, the data
warehouse project is expected to begin in early 2005.
Financial Information
The MD& A provides an overview of the State’s financial activities addressing both
governmental and business- type activities reported in the government- wide financial statements.
In addition, MD& A focuses on the State’s major funds: the General Fund, the Highway Fund
and the Highway Trust Fund.
The State contributes to the Teachers' and State Employees' Retirement System, the
Consolidated Judicial Retirement System, the Legislative Retirement System, the Firemen's and
Rescue Squad Workers' Pension Fund, the Supplemental Retirement Income Plan of North
Carolina, and the North Carolina National Guard Pension Fund. The Local Governmental
Employees' Retirement System is administered by the State but the State is not a participant.
The retirement systems experienced a total return from investments of 12.01% for the one-year
period, a return of 4.85% for the three- year period and a return of 4.18% for the five- year
period, ended June 30, 2004. These returns represent strong investment results, and reflect the
conservative asset allocation and attention to investment quality that have guided the plan’s
investment policy. The combined North Carolina Retirement Systems lead the nation in fiscal
health because of wise management, consistent state contributions and a conservative
investment strategy.
The Teachers' and State Employees' Retirement System ( TSERS), the largest of the
pension trust funds, continued to be fully funded, based on the December 31, 2003 actuarial
valuation. Specifically, the TSERS was funded at 108.1%, with the actuarial value of assets of
$ 45.118 billion exceeding the actuarial accrued liability of $ 41.734 billion by $ 3.384 billion at
December 31, 2003. Employer contributions to the TSERS increased by $ 55.8 million above
the prior fiscal year. Investment balances increased by $ 3.546 billion, or 8.21% above the prior
fiscal year, with a net investment income of $ 5.132 billion. The TSERS experienced a $ 149.3
million increase in benefit payments to retirees, an increase of 7.4% from fiscal year 2003.
The State's general obligation bonds are rated Aa1 by Moody's, AAA by Standard &
Poors, and AAA by Fitch. These favorable ratings have enabled the State to sell its bonds at
interest rates considerably below the Bond Buyer's Index, thereby providing substantial savings
to North Carolina taxpayers.
It is the policy of the State that all agencies, institutions, departments, bureaus, boards,
commissions and officers of the State shall devise techniques and procedures for the receipt,
deposit and disbursement of monies coming into their control and custody which are designed to
maximize interest- bearing investment of cash, and to minimize idle and nonproductive cash
balances. The State Controller, with the advice and assistance of the State Treasurer, the State
Budget Officer, and the State Auditor, develops, implements, and amends the Statewide Cash
Management Policy. All cash deposited with the State Treasurer by State entities is managed in
pooled investment accounts to maximize interest earnings. During fiscal year 2004,
Pension
Benefits
Debt
Administration
Cash
Management
16 State of North Carolina
uncommitted State funds were invested in short- term and medium- term U. S. Government notes
and bonds, as well as other deposits, which had a composite average yield of 3.22%.
The State maintains self- insurance programs for employee health; general liability; medical
malpractice; workers’ compensation; and automobile, fire and other property losses. The State
limits its risk for general liability; medical malpractice; and automobile fire and other property
losses by purchasing private insurance for losses in excess of deductibles. See Note 14 of the
Notes to the Financial Statements for a full description of the State's risk management program.
Other Information
In compliance with State statute, an annual financial audit of the State reporting entity is
completed each year by the North Carolina Office of the State Auditor. The Auditor's
examination was conducted in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States, and his
opinion has been included in this report. In addition, the State coordinates the Single Audit
effort of all federal funds through the State Auditor.
The Government Finance Officers Association of the United States and Canada ( GFOA)
awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of
North Carolina for its comprehensive annual financial report ( CAFR) for the fiscal year ended
June 30, 2003. The Certificate of Achievement is a prestigious national award recognizing
conformance with the highest standards for preparation of state and local government financial
reports.
In order to be awarded a Certificate of Achievement, a government unit must publish an
easily readable and efficiently organized comprehensive annual financial report, whose contents
conform to program standards. The CAFR must satisfy both generally accepted accounting
principles and applicable legal requirements.
A Certificate of Achievement is valid for a period of one year only. We believe our
current report continues to conform to the Certificate of Achievement program requirements,
and we are submitting it to GFOA.
In conclusion, we believe this report provides useful data to all parties using it in
evaluating the financial activity of the State of North Carolina. We in the Office of the State
Controller express our appreciation to the financial officers throughout State government and to
the Office of the State Auditor for their dedicated efforts in assisting us in the preparation of this
report. Any questions concerning the information contained in this Comprehensive Annual
Financial Report should be directed to the Office of the State Controller at ( 919) 981- 5454.
Respectfully submitted,
Robert L. Powell
State Controller
December 8, 2004
Risk
Management
Independent
Audit
Certificate of
Achievement
Acknowledgments
State of North Carolina 17
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CERTIFICATE OF ACHIEVEMENT
20 State of North Carolina
ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT
INCLUDING PRINCIPAL STATE OFFICIALS
EXECUTIVE BRANCH
Council of State
Governor
Michael F. Easley
Lieutenant Governor
Beverly E. Perdue
Secretary of State
Elaine F. Marshall
State Auditor
Ralph Campbell, Jr.
State Treasurer
Richard H. Moore
Superintendent of
Public Instruction
Dr. Michael E. Ward
Attorney General
Roy A. Cooper, III
Commissioner of
Agriculture
Britt Cobb, Jr.
Commissioner of
Labor
Cherie K. Berry
Commissioner of
Insurance
James E. Long
Cabinet Secretaries — Appointed by the Governor
Administration
Gywnn T. Swinson
Correction
Theodis Beck
Crime Control and
Public Safety
Bryan E. Beatty
Cultural Resources
Lisbeth C. Evans
Commerce
James T. Fain
Environment
& Natural Resources
William G. Ross, Jr.
Health and Human
Services
Carmen Hooker Odom
Revenue
E. Norris Tolson
Transportation
W. Lyndo Tippett
Appointed by Governor, confirmed by Legislature
Office of the
State Controller
Robert L. Powell
State Controller
State Board
of Education
Howard N. Lee
Chairman
H. Martin Lancaster
President
Molly C. Broad
President
Appointed by University
Board of Governors
Appointed by State Board
of Community Colleges
Juvenile Justice and
Delinquency Prevention
George L. Sweat
State of North Carolina 21
LEGISLATIVE BRANCH JUDICIAL BRANCH
Component Units
State of North Carolina Web Page
http:// www. ncgov. com
North Carolina
Supreme Court
Chief Justice
I. Beverly Lake, Jr.
Associate Justices
Edward Thomas Brady
Robert H. Edmunds, Jr.
Paul Newby
Mark D. Martin
Sarah Parker
George L. Wainwright, Jr.
Administrative
Office of the Courts
Judge Ralph A. Walker
Director
University of North
Carolina System
Community Colleges State Education
Assistance Authority
General Assembly
Senate
House of
Representatives
Co- Speakers
James B. Black
Richard T. Morgan
Democratic Leader
Joe Hackney
Republican Leader
Joe Kiser
President
Lieutenant Governor
President Pro Tempore
Marc Basnight
Deputy Pres. Pro Tempore
Charlie Smith Dannelly
Majority Leader
Tony Rand
Minority Leader
James Forrester
The Golden LEAF, Inc. NC Housing Finance
Agency
Other Component
Units
22 State of North Carolina
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FINANCIAL
SECTION
24 State of North Carolina
State of North Carolina 25
26 State of North Carolina
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MANAGEMENT’S
DISCUSSION AND
ANALYSIS
28 State of North Carolina
Financial
Highlights
MANAGEMENT'S DISCUSSION AND ANALYSIS ( MD& A)
The following is a discussion and analysis of the State of North Carolina’s ( the State’s) financial
performance, providing an overview of the activities for the fiscal year ended June 30, 2004. Please
read it in conjunction with the transmittal letter at the front of this report and with the State's financial
statements, which follow this section.
Government- wide Financial Statements:
⎯ The State’s total net assets increased slightly as a result of this year’s operations. While net assets
of governmental activities increased by $ 613.2 million, or nearly 2.7 percent, net assets of
business- type activities decreased by $ 204.5 million, or about 21.3 percent ( decline related to the
Unemployment Compensation Fund). At year- end, net assets of governmental activities and
business- type activities totaled $ 22.98 billion and $ 754.1 million, respectively.
⎯ Component units reported net assets of $ 10.66 billion, an increase of $ 1.08 billion or 11.3 percent
from the previous year. The majority of the increase ($ 762 million) is due to the net increase in
capital assets for the University of North Carolina System and community colleges ( component
units). The capital asset additions were financed in part by State debt proceeds.
⎯ GASB Statement No. 39 became effective during the fiscal year ( see Notes 20 and 21 to the
financial statements). The beginning net assets of the University of North Carolina System and
community colleges were increased by $ 713 million to include nongovernmental component unit
foundations.
Fund Financial Statements:
⎯ As of the close of the fiscal year, the General Fund reported a total fund balance of negative $ 196.3
million, with reserves of $ 197.4 million, and an unreserved fund balance of negative $ 393.7
million. The total fund balance of the General Fund decreased from the prior year balance of
negative $ 167.1 million.
⎯ The Highway Fund and the Highway Trust Fund reported total fund balances of $ 227.8 million and
$ 266.1 million, respectively.
⎯ The State’s two major enterprise funds, the Unemployment Compensation Fund and the EPA
Revolving Loan Fund, reported net assets of $ 20.1 million and $ 640.5 million, respectively. The
net assets of the Unemployment Compensation Fund decreased by 93 percent from the prior fiscal
year- end.
Capital Assets:
⎯ The State’s investment in capital assets ( net of accumulated depreciation) was $ 25.61 billion,
which represents an increase of 7.7 percent from the previous fiscal year.
⎯ The largest component of capital assets, the State highway system, includes roadway surfaces,
bridges, signage, railings, markings, traffic signals, and other structures related to the State’s motor
vehicle transportation system. The system includes 78,615 miles of roadway, constituting the
second largest highway system in the nation. The system also includes 17,250 bridges spanning
380 miles. At year- end, the State reflected $ 13.28 billion ( net of accumulated depreciation) of
highway system infrastructure.
⎯ Major capital asset activity included additions to the State highway system ($ 1.2 billion), right- of-way
acquisitions ($ 510 million) and the acquisition/ construction of correctional facilities ($ 239
million).
Long- term Debt:
⎯ The State had long- term debt outstanding of $ 5.54 billion, an increase of 34.9 percent from the
previous fiscal year- end. The long- term debt balance includes $ 519.6 million of special obligation
( non- voted) debt issued for governmental activities.
⎯ The State maintained its AAA bond rating with Standard and Poor’s and Fitch. In August 2002,
Moody’s downgraded the State’s credit rating for general obligation debt from “ AAA” to “ Aa1”,
representing the first time since 1960 that North Carolina had less than a “ AAA” rating. In
September 2004, Moody’s revised the State’s outlook to positive from stable.
State of North Carolina 29
OVERVIEW OF THE FINANCIAL STATEMENTS
This discussion and analysis is an introduction to the State’s basic financial statements, which
comprise three components: 1) government- wide financial statements, 2) fund financial statements, and
3) notes to the financial statements. This report also contains additional required supplementary
information ( General Fund budgetary schedule, pension funding progress and contributions) and other
supplementary information ( combining financial statements) in addition to the basic financial
statements. These components are described below.
Government- wide Financial Statements
The Statement of Net Assets and the Statement of Activities are two financial statements that report
information about the State, as a whole, and about its activities that should help answer this question: Is
the State, as a whole, better off or worse off as a result of this year’s activities? These statements
include all non- fiduciary assets and liabilities using the accrual basis of accounting. The current year’s
revenues and expenses are taken into account regardless of when cash is received or paid. The
Statement of Net Assets ( page 52) presents all of the State’s assets and liabilities, with the difference
between the two reported as “ net assets”. Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or deteriorating.
The Statement of Activities ( pages 54 and 55) presents information showing how the State’s net
assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the
underlying events giving rise to the change occur, regardless of the timing of related cash flows.
Therefore, revenues and expenses are reported in these statements for some items that will only result in
cash flows in future fiscal periods ( e. g. uncollected taxes and earned but unused vacation leave).
Both statements report three activities:
Governmental Activities – Most of the State’s basic services are reported under this category. Taxes and
intergovernmental revenues generally fund these services.
Business- type Activities – The State charges fees to customers to help it cover all or most of the cost of
certain services it provides. The State’s Unemployment Compensation Fund and the EPA Revolving
Loan Fund are the predominant business- type activities.
Discretely Presented Component Units – Component units are legally separate organizations for which
the elected officials of the primary government are financially accountable. A description of the
component units and an address for obtaining their separately issued financial statements can be found
beginning on page 70. All component units are combined and displayed in a separate discrete column
in the government- wide financial statements to emphasize their legal separateness from the State. In
addition, financial statements for major component units are presented in the notes to the financial
statements ( pages 137 and 138).
Fund Financial Statements
The fund financial statements begin on page 58 and provide detailed information about the major
individual funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts that the
State uses to keep track of specific sources of funding and spending for a particular purpose. In addition
to the major funds, page 160 begins the individual fund data for the non- major funds. The State's funds
are divided into three categories, governmental, proprietary, and fiduciary, and they use different
accounting approaches.
Governmental funds -- Most of the State's basic services are reported in the governmental funds,
which focus on how money flows into and out of those funds and the balances left at year- end that
are available for future spending. The governmental fund financial statements provide a detailed
short- term view of the State's general government operations and the basic services it provides.
Governmental fund information helps determine whether there are more or fewer financial
resources that can be spent in the near future to finance the State's programs. These funds are
reported using modified accrual accounting, which measures cash and all other financial assets that
30 State of North Carolina
can readily be converted to cash. Governmental funds include the general, special revenue, capital
project, and permanent funds. Because the focus of governmental funds is narrower than that of
the government- wide financial statements, it is useful to compare the information presented for
governmental funds with similar information presented for governmental activities in the
government- wide financial statements. By doing so, readers may better understand the long- term
impact of the government’s near- term financing decisions. Both the governmental fund balance
sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances
provide a reconciliation to facilitate this comparison between governmental funds and
governmental activities.
Proprietary funds -- When the State charges customers for the services it provides, whether to
outside customers or to other agencies within the State, these services are generally reported in
proprietary funds. Proprietary funds ( enterprise and internal service) utilize accrual accounting; the
same method used by private sector businesses. Enterprise funds are used to report activities for
which fees are charged to external users for goods and services. The Unemployment Compensation
Fund and the EPA Revolving Loan Fund are our most significant enterprise funds. Internal service
funds are used to report activities that provide goods and services to the State’s other programs and
activities on a cost- reimbursement basis. - such as the State's State Property Fire Insurance Fund,
the Motor Fleet Management Fund, Computing Services Fund, and Telecommunications Services
Fund. Internal service funds are reported as governmental activities on the government- wide
statements.
Fiduciary funds -- The State acts as a trustee or fiduciary, for its employee pension plans. It is also
responsible for other assets that, because of a trust arrangement, can be used only for the trust
beneficiaries. The State's fiduciary activities are reported in separate Statements of Fiduciary Net
Assets and Changes in Fiduciary Net Assets. These funds, which include pension and other
employee benefits, private- purpose, investment trust, and agency funds, are reported using accrual
accounting. The government- wide financial statements exclude fiduciary fund activities and
balances because these assets are restricted in purpose and cannot be used to support the State’s
own programs.
Notes to the Financial Statements
The notes provide additional information that is essential to a full understanding of the data provided
in the government- wide and fund financial statements. The notes to the financial statements can be
found beginning on page 68 of this report.
Additional Required Supplementary Information
Following the basic financial statements and note disclosures is additional Required Supplementary
Information that further explains and supports the information in the financial statements. The Required
Supplementary Information includes General Fund budgetary comparison schedules reconciling the
statutory and generally accepted accounting principles ( GAAP) fund balances at fiscal year- end, and
pension plan trend information related to funding progress and contributions.
Supplementary Information
Supplementary information includes the introductory section, and the combining financial
statements for non- major governmental, proprietary, and fiduciary funds and for non- major discretely
presented component units. These funds are added together, by fund type, and presented in single
columns in the basic financial statements, but are not reported individually, as with major funds, on the
governmental fund financial statements.
State of North Carolina 31
FINANCIAL ANALYSIS OF THE STATE AS A WHOLE
The State’s combined net assets increased $ 408.7 million or 1.8 percent over the course of this fiscal
year’s operations. The net assets of the governmental activities increased $ 613.2 million or 2.7 percent
and business- type activities had a decrease of $ 204.5 million or 21.3 percent. The following table was
derived from the government- wide Statement of Net Assets:
Net Assets
June 30, 2004 and 2003
( dollars in thousands)
2004 2003 2004 2003 2004 2003
Current and other non-current
assets.......................................... $ 1 0,668,632 $ 9 ,882,858 $ 1,217,551 $ 1,161,973 $ 1 1,886,183 $ 1 1,044,831
Capital assets, net....................................... 25,556,896 23,719,972 49,507 46,272 25,606,403 23,766,244
Total assets................................................ 36,225,528 33,602,830 1,267,058 1,208,245 37,492,586 34,811,075
Long- term liabilities...................................... 5,970,092 4,376,222 10,242 10,270 5,980,334 4,386,492
Other liabilities............................................. 7,274,030 6,858,429 502,697 239,375 7,776,727 7,097,804
Total liabilities........................................... 13,244,122 11,234,651 512,939 249,645 13,757,061 11,484,296
Net assets:
Invested in capital assets,
net of related debt.................................... 24,706,355 23,449,373 40,277 38,450 24,746,632 23,487,823
Restricted.................................................... 1,454,729 1,068,233 665,547 863,426 2,120,276 1,931,659
Unrestricted................................................. ( 3,179,678) ( 2,149,427) 48,295 56,724 ( 3,131,383) ( 2,092,703)
Total net assets......................................... $ 2 2,981,406 $ 2 2,368,179 $ 754,119 $ 958,600 $ 2 3,735,525 $ 2 3,326,779
Governmental Business- type Total Primary
Activities Activities Government
The largest component of the State’s net assets ($ 24.75 billion) reflects its investment in capital
assets ( land, buildings, machinery and equipment, State highway system, and other capital assets), less
related debt still outstanding that was used to acquire or construct those assets. Restricted net assets are
the next largest component ($ 2.12 billion). Net assets are restricted when constraints placed on their
use are either externally imposed or are imposed by law through constitutional provisions or enabling
legislation. The remaining portion, unrestricted net assets, consists of net assets that do not meet the
definition of “ restricted “ or “ invested in capital assets, net of related debt.”
The government- wide statement of net assets for governmental activities reflects a negative $ 3.18
billion unrestricted net asset balance. The State of North Carolina, like many other state and local
governments, issues general obligation debt and distributes the proceeds to local governments and
component units. The proceeds are used to construct new buildings and renovate and modernize
existing buildings on the State’s community college and university campuses, assist county
governments in meeting their public school building capital needs, and to provide grants and loans to
local governments for clean water and natural gas projects. Of the $ 5.54 billion of total long- term debt
outstanding at June 30, 2004, $ 4.57 billion is attributable to debt issued as State aid to component units
( universities and community colleges) and local governments. The balance sheets of component unit
and local government recipients reflect ownership of the related constructed capital assets without the
burden of recording the debt obligation. The policy of selling general obligation bonds and funneling
the cash proceeds to non- primary government ( non- State) entities has been in place for decades.
However, by issuing such debt, the State is left to reflect significant liabilities on its statement of net
assets ( reflected in the unrestricted net asset component) without the benefit of recording the capital
assets constructed or acquired with the proceeds from the debt issuances. Additionally, as of June 30,
2004, the State’s governmental activities have significant unfunded liabilities for compensated absences
in the amount of $ 327 million and a $ 7.5 million cost settlement payable to the federal government ( see
Note 7 to the financial statements). These unfunded liabilities also contribute to the negative
unrestricted net asset balance for governmental activities.
32 State of North Carolina
Governmental
Activities
The following financial information was derived from the government- wide Statement of Activities
and reflects how the State’s net assets changed during the fiscal year:
Changes in Net Assets
For the Fiscal Years Ended June 30, 2004 and 2003
( dollars in thousands)
Governmental Business- type Total Primary
Activities Activities Government
2004 2003 2004 2003 2004 2003
Revenues:
Program revenues:
Charges for services............................................. $ 1 ,505,090 $ 1 ,339,016 $ 926,891 $ 688,786 $ 2 ,431,981 $ 2 ,027,802
Operating grants and contributions........................ 10,108,124 9,042,843 305,053 504,550 10,413,177 9,547,393
Capital grants and contributions............................ 884,345 527,498 892 1,241 885,237 528,739
General revenues:
Taxes
Individual income tax......................................... 7,407,455 7,122,099 — — 7,407,455 7,122,099
Corporate income tax........................................ 760,180 921,611 — — 760,180 921,611
Sales and use tax.............................................. 4,293,040 4,029,403 — — 4,293,040 4,029,403
Gasoline tax...................................................... 1,276,627 1,154,986 — — 1,276,627 1,154,986
Franchise tax..................................................... 560,708 584,584 — — 560,708 584,584
Highway use tax................................................ 578,346 552,759 — — 578,346 552,759
Insurance tax..................................................... 432,975 417,126 — — 432,975 417,126
Beverage tax..................................................... 213,271 198,848 — — 213,271 198,848
Inheritance tax................................................... 128,352 112,150 — — 128,352 112,150
Other taxes........................................................ 313,985 289,261 — — 313,985 289,261
Tobacco settlement............................................... 147,224 173,256 — — 147,224 173,256
Federal grants not restricted to
specific programs.............................................. 136,859 136,859 — — 136,859 136,859
Unrestricted investment earnings.......................... 77,225 103,987 — — 77,225 103,987
Miscellaneous....................................................... 62,601 41,137 3 — 62,604 41,137
Total revenues..................................................... 28,886,407 26,747,423 1,232,839 1,194,577 30,119,246 27,942,000
Expenses:
General government.............................................. 807,248 773,807 — — 807,248 773,807
Primary and secondary education......................... 7,223,766 6,865,921 — — 7,223,766 6,865,921
Higher education................................................... 3,140,794 2,814,375 3,140,794 2,814,375
Health and human services................................... 11,729,904 10,611,537 — — 11,729,904 10,611,537
Economic development......................................... 536,055 489,111 — — 536,055 489,111
Environment and natural resources....................... 599,575 538,032 — — 599,575 538,032
Public safety, corrections and regulation............... 2,093,404 2,029,233 — — 2,093,404 2,029,233
Transportation....................................................... 1,870,578 1,640,007 — — 1,870,578 1,640,007
Agriculture............................................................. 82,394 73,974 — — 82,394 73,974
Interest on long- term debt..................................... 191,228 151,258 — — 191,228 151,258
Unemployment compensation............................... — — 1,389,266 1,603,796 1,389,266 1,603,796
EPA Revolving Loan............................................. — — 5,342 4,266 5,342 4,266
Other business- type activities................................ — — 43,014 30,750 43,014 30,750
Total expenses.................................................... 28,274,946 25,987,255 1,437,622 1,638,812 29,712,568 27,626,067
Increase ( decrease) in net assets before
contributions and transfers................................ 611,461 760,168 ( 204,783) ( 444,235) 406,678 315,933
Contributions to permanent funds......................... 2,068 1,806 — — 2,068 1,806
Transfers............................................................... ( 302) 4,918 302 ( 4,918) — —
Increase ( decrease) in net assets....................... 613,227 766,892 ( 204,481) ( 449,153) 408,746 317,739
Net assets - beginning - restated........................... 22,368,179 21,601,287 958,600 1,407,753 23,326,779 23,009,040
Net assets - ending............................................... $ 2 2,981,406 $ 2 2,368,179 $ 754,119 $ 958,600 $ 2 3,735,525 $ 2 3,326,779
As a result of this year’s operations, the net assets of governmental activities increased by $ 613.2
million or 2.7 percent. The net asset increase is primarily related to the overall growth in tax revenues
( e. g., individual income, sales and use, and gasoline taxes) and spending reversions realized during the
current fiscal year. The major exception to the growth in taxes was corporate taxes, which declined
17.5 percent from the previous fiscal year- end. Key factors in the decline in corporate taxes were
reduced collections, an overall increase in the estimated refund rate, and the legislative suspension in
the prior year of required distributions to special revenue funds. Although corporate profits were up,
corporate tax collections were down because of tax code changes that allowed businesses to write- off
expenses more quickly and the utilization of tax breaks and other incentives designed to attract new
jobs to the State. Also, in the prior year, a portion of corporate income taxes, required to be distributed
to special revenue funds, were retained by the General Fund to manage a budget shortfall.
State of North Carolina 33
Total expenses of governmental activities grew by 8.8 percent during the current period ( compared
to total revenues growth of 8.0 percent). The majority of the spending growth was the result of funding
increases in the State’s two largest functional areas, education and health and human services. The
increase in education spending is related to enrollment increases at the State’s universities and
community colleges and funding increases for the State’s public schools. The growth in health and
human services is the result of increased spending for Medicaid, which is the State’s largest public
assistance program. The growth in Medicaid is explained by an increase in individuals eligible for
Medicaid services, a large increase in payments for dental services due to a lawsuit settlement that
raised dental rates, and a significant increase in prescription drug payments and Disproportionate Share
Hospital payments. There were also significant increases in the Electronic Benefits program due to
higher client participation as a result of the recent economic downturn.
The following chart depicts revenue sources of governmental activities as percentages of total
revenues for the fiscal year:
Revenues - Governmental Activities
Fiscal Year Ended June 30, 2004
Charges for services
5%
Capital grants and
contributions
3%
Individual income and
corporate income taxes
28%
Gasoline and highway
use taxes
6%
Other taxes
6%
Miscellaneous
1%
Sales and use tax
15%
Operating grants and
contributions
36%
The following chart depicts the total expenses and total program revenues of the State’s
governmental functions. This format identifies the extent to which each governmental function is self-financing
through fees and intergovernmental aid or draws from the general revenues of the State.
34 State of North Carolina
Business- type
Activities
Expenses - Governmental Activities
Fiscal Year Ended June 30, 2004
—
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
$ 6,000
$ 7,000
$ 8,000
$ 9,000
$ 10,000
$ 11,000
$ 12,000
$ 13,000
General
government
Primary and
secondary
education
Higher
education
Health and
human services
Economic
development
Environment
and natural
resources
Public safety,
corrections, and
regulation
Transportation Agriculture Interest on long-term
debt
Expenses
Program Revenues ( excluding Capital
Grants)
Millions
The following chart reflects the dollar change in the functional expenses of governmental activities
between fiscal years 2003 and 2004:
Dollar Change in Governmental Activities Functional Expenses
Between Fiscal Years 2003 and 2004
$ 40
$ 8
$ 231
$ 64
$ 62
$ 47
$ 1,118
$ 326
$ 358
$ 33
$— $ 200 $ 400 $ 600 $ 800 $ 1,000 $ 1,200
Interest on long- term debt
Agriculture
Transportation
Public safety, corrections and regulation
Environment and natural resources
Economic development
Health and human services
Higher education
Primary and secondary education
General government
( dollars in millions)
Business- type activities reflect a decrease in net assets of $ 204.5 million or 21.3 percent. The key
reason for the decline was the Unemployment Compensation Fund’s significant operating loss, which
was financed by the proceeds of short- debt. At year- end, the net assets of the Unemployment
Compensation Fund were $ 20.1 million, a decrease of $ 257.4 million or 92.7 percent from the prior
fiscal year- end. The Unemployment Compensation Fund and the EPA Revolving Loan Fund are the
predominant activities, comprising 87.6 percent of the total net assets of business- type activities. A
more detailed discussion of the State’s enterprise funds is provided in the following section.
State of North Carolina 35
Governmental
Funds
FINANCIAL ANALYSIS OF THE STATE’S FUNDS
The State uses fund accounting to ensure and demonstrate compliance with finance- related legal
requirements
The focus of the State’s governmental funds is to provide information on near- term inflows,
outflows, and balances of spendable resources. As of the end of the fiscal year, the State’s
governmental funds reported combined ending fund balances of $ 3.0 billion, a 14.7 percent increase
from the prior fiscal year- end ( as restated). The majority of the increase was related to debt proceeds
recognized in other governmental funds for the N. C. Infrastructure Finance Corporation ( Corporation),
a blended component unit of the State. The Corporation issued debt for the repair and renovation of
State facilities and for the acquisition and construction of correctional facilities. The major
governmental funds are discussed individually below.
General Fund
The General Fund is the chief operating fund of the State. The fund balance of the General Fund
decreased from a negative $ 167.139 million at June 30, 2003 ( as restated) to a negative $ 196.287
million at June 30, 2004. A key factor in the decline was the Department of Revenue’s revision of the
refund rate for corporate taxes, which resulted in a $ 45.8 million reduction in corporate tax revenues for
the 2004 fiscal year ( Note: GAAP requires tax revenues to be reported net of estimated refunds). In
addition, the total fund deficit continues to be influenced by the excess of accrued expenditures over
accrued revenues for the State’s Medicaid program. A more detailed analysis of the General Fund is
provided in the budgetary highlights section ( see next section).
2003- 2004 General Fund Budgetary Highlights
The General Fund budget for fiscal year 2003- 04 was signed into law on June 30, 2003. The enacted
budget was founded upon an overall nominal ( real growth plus inflation) economic growth rate of 3.5
percent for 2003- 04. The appropriated budget included provisions that were designed to increase
General Fund revenues. The most significant revenue adjustment was the continuation of two
temporary tax increases that were scheduled to expire in 2003. In 2001, the General Assembly
temporarily raised the State sales tax rate by a half- cent to 4.5 percent and the highest individual income
tax rate from 7.75 percent to 8.25 percent. The budget continues the State sales tax rate at 4.5 percent
and the 8.25 percent income tax bracket. In addition, several streamlining and conformity provisions,
as well as departmental fees, were authorized that increase General Fund availability. Finally the
Department of Revenue was given broader authority and resources to collect unpaid tax liabilities. The
following table summarizes the 2004 revenue enhancements ( amounts expressed in millions).
Revenue Enhancements – 2004 Fiscal Year
Maintain State sales tax at 4.5%................................................... $ 341.8
Maintain top income tax bracket.................................................... 37.5
Streamline tax revisions................................................................ 78.5
Department of Revenue - Project Tax Collect................................ 90.2
Tobacco settlement funds ............................................................ 66.8
Fee increases and trust fund transfers.......................................... 87.0
Tax reductions for federal conformity............................................. ( 70.0)
Federal fiscal relief........................................................................ 136.9
Federal disaster relief funds.......................................................... 108.8
Total 2004 enhancements.................................................... $ 877.5
The majority of funding increases for 2004 were in the education and human service areas. The
budget provided full funding for enrollment increases in the University of North Carolina System
($ 46.6 million), the community college system ($ 32 million), and private colleges and universities ($ 2.8
36 State of North Carolina
million). In addition, the budget includes funds to hire additional public school teachers to reduce class
size in the second grade ($ 25.3 million) and to expand the Governor’s More- at- Four Program ($ 8.4
million), which helps prepare at risk four- year- old children for success in school. It also provides funds
for the annual step increase for public school teachers ($ 48.1 million) and for ABC bonuses earned in
the 2002- 03 school year ($ 96 million).
The budget provides additional funding for the Health Insurance Program for Children ($ 12.2
million), which allows all eligible children to receive health care insurance ( see Note 14C to the
financial statements). In addition, expansion funds are provided for the Mental Health Trust Fund
($ 12.5 million) to facilitate the progress toward mental health reform.
The budget provided over $ 200 million in 2003- 04 to support employee benefit programs.
Specifically, it authorized a $ 550 one- time compensation bonus for State employees not included on the
teacher salary schedule. In addition, the State Health Plan received sufficient funds to cover increased
employee- related health care costs without reduction in benefits. The budget also began repayment of
the funds withheld from the Retirement System in 2000- 01 due to the budget shortfall ( Note: the total
obligation to the Retirement System was $ 129.9 million plus accrued interest). Legislation was enacted
in 2001 to formalize the General Assembly’s intent to repay the debt, subject to the availability of
funds, over a five- year period beginning July 1, 2003. The budget authorized the payment of $ 10
million to partially repay the debt to the Retirement System. At year- end, the General Assembly
authorized an additional payment of $ 20 million to the Retirement System.
General Fund Budget Variances
The original General Fund budget, including State appropriations and appropriations supported by
departmental receipts, serves as a starting point or plan for the Governor to execute the General Fund
budget pursuant to the powers granted by the Executive Budget Act. At the state level in North
Carolina, it is not unusual for the budget to change during the fiscal year in relation to budget
adjustments made to accommodate departmental receipts. The General Fund budget supported by State
appropriation, is a subset of the General Fund financial schedule presented in the CAFR as required
supplementary information. The current CAFR schedule reflects all spending required to support the
State’s General Fund activities and the funding to support those activities, including State tax and non-tax
revenues, federal revenues, student tuition, and other fees, licenses, and fines.
Under current State budget management practice, particularly related to departmental federal
receipts, primary emphasis is placed on comparisons of the final authorized budget and actual spending.
At the State level, budgetary cuts related to State appropriations are implemented by decreasing
allowable actual expenditures, as opposed to decreasing the State appropriation through a formal
legislative process. The Governor and State agencies maintain legal authority to spend the dollars
originally appropriated to them, however, in recent years the actual spending has been limited by the
collection of tax and nontax revenue. In extremely rare cases, the General Assembly has held special
sessions to formally amend the State appropriation budget.
The portion of the original budget comprising departmental receipts is not intended to be the sole
controlling point to manage the State’s General Fund budget. The final budget includes amendments
for departmental receipts collected during the fiscal year as allowed by law. General Fund departmental
receipts are typically authorized for expenditure within the activity that generated the receipt.
Historically, final estimated receipts have varied significantly from the original estimate at the
beginning of the fiscal year. State agencies by law must spend departmental receipts prior to spending
tax and nontax supported appropriations. If departmental receipts are higher than expected,
appropriated dollars may go unspent and be re- appropriated in a subsequent fiscal year.
State of North Carolina 37
Variances – Original and Final Budget
The budget variance between original and final budget for federal funds revenue is attributable to
the awarding of new federal funds during the fiscal year and funds being drawn down to reimburse
unanticipated expenditures.
The budget variance for intra- governmental transactions revenue is attributable primarily to the
following: $ 81.5 million of statewide encumbrance carry forward amounts from fiscal year 2002- 2003,
$ 126.4 million of Medicaid Disproportionate Share, $ 8.3 million of Department of Health and Human
Services ( DHHS)- cost report settlement, $ 272.9 million of DHHS- intra- governmental transfers within a
DHHS general fund budget code, $ 351.2 million of DHHS funds transferred from various budget codes
within DHHS, and $ 14.8 million of Mental Health Trust Fund intra- governmental transfers.
The budget variance for contributions, gifts and grants revenue is attributable primarily to the
decision by the Division of Medical Assistance to change an accounting process to go on cost
allocation, leading to the unexpected budgeting of $ 129.1 million for the State match.
For expenditures, the variances between the original budget and final budget are related to the
corresponding revenue budget variances. As revenue budget accounts are increased, a corresponding
increase occurs in the expenditure budget accounts. In addition to those increases, agency expenditure
budgets were also increased by the allocation of statewide reserves such as the legislative salary
increase, health insurance, and retirement reserves. There was also an additional appropriation of $ 88.1
million authorized for fiscal year 2003- 2004 as a result of special sessions of the General Assembly.
Variances - Final Budget and Actual Results
The budget variance between final budget and actual revenues for corporate income taxes occurred
because the growth in corporate profits exceeded the forecast. Investment Income was below the final
budget because market interest rates were below the forecast.
Departmental federal funds actually received by agencies were $ 741.9 million less than the final
budget. Of this variance, $ 357.2 million was attributable to the Department of Public Instruction.
Actual federal draw downs are reflective of the actual expenditures of these federal funds. In addition,
$ 190.8 million of the Federal funds variance is attributable to the Department of Health and Human
Services not incurring qualifying costs as budgeted.
For expenditures, the variances between final budget and actual expenditures for primary and
secondary education and public safety, corrections, and regulation occurred because actual revenues
were less than the budgeted revenues; therefore, expenditures that depended on the receipt of these
funds could not be made.
The State ended fiscal year 2003- 04 with an over- collection of tax revenues of $ 242.4 million. The
major tax categories that exceeded the budgeted forecast were individual income ( 1.1%), corporate
income ( 9.2%), and sales and use ( 4.1%). In addition, unexpended appropriations or reversions of $ 159
million were realized. The State fiscal year 2003- 04 closed out with a $ 289.4 million unreserved fund
balance after transferring $ 116.7 million to the Rainy Day Fund and $ 76.8 million to the Repair and
Renovation Reserve.
38 State of North Carolina
Highway Fund
The Highway Fund dates back to 1921, which is when the N. C. General Assembly first imposed the
gasoline tax. It accounts for most of the activities of the North Carolina Department of Transportation,
including the maintenance and construction of the State’s primary, secondary, and urban road systems,
the State Highway Patrol, the Division of Motor Vehicles, and transit and rail. The primary revenue
sources of the Highway Fund are federal funds, three- fourths of gasoline taxes, vehicle registration fees,
and driver’s license fees.
The fund balance of the State Highway Fund decreased from $ 299.9 million at June 30, 2003 to
$ 227.8 million at June 30, 2004, a decrease of 24 percent. The decline was the result of total
expenditures exceeding total revenues for the current period. Over the past three years, the North
Carolina Department of Transportation has used excess cash to advance construction projects and to
accelerate contract resurfacing. Unbudgeted emergency relief expenditures for Hurricane Isabel and
several ice storms also impacted cash flow. However, the excess of expenditures over revenues of
$ 185.3 million in 2004 was smaller than the previous fiscal year because total revenues grew at a faster
rate than total expenditures. Total revenues increased by $ 252.2 million or 11.7 percent primarily
because of increases in gasoline taxes and federal funds. A 4 percent increase in taxable gallons sold
combined with a 3 percent boost in the average fuel tax per gallon raised fuel tax revenues by $ 89.2
million. Federal billings rose $ 180.7 million due to increased Federal Highway Administration
construction. Total expenditures increased by $ 207.7 million or 8.7 percent due to increased
maintenance and construction expenditures. In addition, operating transfers to other funds increased by
$ 24.4 million. During the fiscal year, the Highway Fund also received an advance of $ 15.4 million
from a municipality for roadway and pedestrian improvements.
In September 2004, the State Board of Transportation approved a new long- range plan that
prioritizes transportation investment for the next 25 years. The Statewide Transportation Plan provides
a blueprint for greater investment in maintenance, preservation, and modernization of the State’s
existing highway system as well as other transportation options such as rail and public transportation.
The share of transportation dollars spent on new highway projects will drop from 45 percent to 26
percent. The highway needs of the State’s growing population will be accommodated in part by
maintaining and upgrading existing roads and by increasing anti- congestion measures such as
synchronized traffic signals.
The centerpiece of the plan is the Recommended Investment Scenario, which outlines priorities from
the estimated $ 55 billion, in today’s dollars, expected to be available over the next 25 years for
transportation investment. Based on this scenario, the Department of Transportation ( NCDOT) will be
able to meet an additional 10 percent of its maintenance and preservation needs and nearly 25 percent
more modernization infrastructure needs. Additionally, the scenario proposes increasing NCDOT’s
investment in other transportation modes. The plan also identifies $ 84 billion in total transportation
needs and states that NCDOT will only be able to meet two- thirds of the State’s 25- year transportation
needs at its current funding levels, regardless of how NCDOT’s resources are allocated. Full
implementation of the Recommended Investment Scenario will be gradual.
Highway Trust Fund
Legislation creating the Highway Trust Fund was passed by the General Assembly in 1989. It was
established to provide a dedicated funding mechanism to meet highway construction needs in North
Carolina. The Highway Trust Fund also provides extra money for the State’s municipalities to
adequately maintain their streets and pays the debt service on the State’s general obligation bonds
issued for highway purposes. The principal revenue sources of the Highway Trust Fund are highway
use taxes, one- fourth of gasoline taxes, and various title and registration fees. From the proceeds of the
highway use tax, $ 252.4 million was transferred to the general fund for the 2003- 04 fiscal year and
thereafter, the transfer amount is scheduled to be $ 240 million per year subject to adjustment for
inflation. The General Fund intends to repay by June 30, 2009 the $ 125 million ( plus interest) advanced
from the Highway Trust Fund during the 2002- 03 fiscal year ( see Note 9 to the financial statements).
State of North Carolina 39
Enterprise
Funds
The fund balance of the Highway Trust Fund increased from $ 208.2 million at June 30, 2003 to
$ 266.1 million at June 30, 2004, an increase of 27.8 percent. The increase was attributable, in part, to
$ 400 million of highway bonds issued on November 2003. The proceeds of these bonds were used to
reimburse highway expenditures of prior years. These bonds constitute a portion of the $ 950 million
highway bond authorization approved by the voters in November 1996 ( Note: $ 250 million of such
bonds were issued in 1997). At year- end, the remaining highway bond authorization was $ 300 million.
Total revenues increased by $ 54.0 million or 5.7 percent, primarily because of increases in the gasoline
tax and the highway use tax. Gasoline taxes rose $ 29.5 million due primarily to a 4 percent increase in
taxable gallons sold combined with a 3 percent rise in the average fuel tax per gallon. Highway use
taxes on vehicle registrations grew $ 25.6 million or 4.6 percent. Total expenditures increased by
$ 220.9 million or 36.3%. The increase is due to a significant rise in contract lettings for the
Transportation Improvement Program and N. C. Moving Ahead projects to address transportation
infrastructure needs.
The 2003 General Assembly passed the Governor’s “ Moving Ahead” transportation initiative to
allow, over two years, the use of $ 630 million of Highway Trust Fund cash balances for highway
preservation, modernization, and maintenance. Additionally, it allows $ 70 million for public transit,
rail, ferry, bicycle, and pedestrian projects.
The State’s enterprise funds or business- type activities provide the same type of information found
in the government- wide financial statements, but in more detail. The major enterprise funds are
discussed individually below.
Unemployment Compensation Fund
The net assets of the Unemployment Compensation Fund decreased by $ 257.4 million during the
current fiscal year, which is a 92.7 percent decrease from the prior fiscal year- end. The decrease is
explained primarily by the fund’s significant operating loss ( excess of operating expenses over
operating income), which was financed by the proceeds of short- term debt. The operating loss was
$ 509.6 million this year versus $ 956.1 million in 2003. At June 30, 2004, the short- term debt balance
was $ 251.8 million compared to zero for the previous year- end. To ensure timely payment of
unemployment benefits, the State received repayable advances from its Federal Unemployment
Account and issued tax anticipation notes ( see Note 6 to the financial statements). The State estimated
that it will save millions of dollars in interest payments by selling tax anticipation notes instead of
borrowing exclusively from the federal government. Unemployment benefit expenses decreased 13.4
percent in fiscal year 2004 to $ 1.39 billion. These expenses were lower because the State’s
unemployment rate fell during the second half of the fiscal year. North Carolina’s seasonally adjusted
unemployment rate was 5.5 percent in June 2004, making four consecutive months that the rate was
below the national average. While manufacturing jobs declined since January 2004, all other sectors of
the economy gained jobs during the second half of the fiscal year. Job gains were especially large in
professional and business services and in educational and health services.
In fiscal years 2003 and 2002, the State also received funding for extended unemployment benefits.
In March 2002, the U. S. Congress signed into law the Temporary Extended Unemployment
Compensation Act of 2002. This program, which is financed entirely by federal funds, provided
extended benefits to claimants who had exhausted their regular State unemployment benefits. This
program ended during the 2004 fiscal year because of the decrease in the State’s average unemployment
rate.
The 2003 Session of the General Assembly enacted legislation to help preserve the integrity of the
unemployment insurance tax system. Session Law 2003- 67 ( Senate Bill 326) clarifies that an employer
cannot avoid an undesirable unemployment insurance rate by shifting employees to a newly created
company with a more desirable tax rate. This practice is known as State unemployment tax avoidance
or “ SUTA dumping” ( i. e., since the bulk of the old company’s employees are moved to a new company
and the higher tax rate of the older company is “ dumped”).
40 State of North Carolina
Starting January 1, 2005, a 20 percent surcharge will be in effect for unemployment insurance
contributions, as required by State statute. The surcharge will be in effect because of the fund’s low
reserves. The proceeds of the surcharge will be credited to the Employment Security Commission
Reserve Fund and will improve the solvency of the Unemployment Compensation Fund.
EPA Revolving Loan Fund
The net assets of the EPA Revolving Loan Fund increased by $ 58.9 million during the current fiscal
year, which was a 10.1 percent increase from the prior fiscal year- end. Operating income was $ 9.99
million ( excess of operating revenues over operating expenses). Net nonoperating revenues were $ 42.9
million, consisting primarily of federal capitalization grants and investment earnings. In addition, $ 7.4
million of clean water bond proceeds were transferred in from special revenue funds.
State of North Carolina 41
Capital
Assets
Capital Asset and Debt Administration
As of June 30, 2004, the State’s investment in capital assets was $ 25.61 billion, which represents an
increase of 7.7 percent from the previous fiscal year- end ( see table below).
Capital Assets as of June 30
( net of depreciation, dollars in thousands)
2004 2003 2004 2003 2004 2003
Land................................................... $ 8 ,300,655 $ 7 ,713,505 $ 2,563 $ 2,563 $ 8 ,303,218 $ 7 ,716,068
Buildings............................................ 1 ,578,963 1 ,369,455 13,231 13,975 1 ,592,194 1 ,383,430
Machinery and equipment.................. 5 62,864 5 51,155 1,314 1,047 5 64,178 5 52,202
Infrastructure:
State highway system..................... 1 3,284,267 1 2,444,212 — — 1 3,284,267 1 2,444,212
Other infrastructure......................... 7 6,859 8 0,489 7,866 8,669 8 4,725 8 9,158
Intangible assets................................ 1 06,506 1 08,927 — — 1 06,506 1 08,927
Art, literature, and other artifacts........ 1 ,126 7 — — 1 ,126 7
Construction in progress.................... 1 ,645,656 1 ,452,222 24,533 20,018 1 ,670,189 1 ,472,240
Total........................................... $ 2 5,556,896 $ 2 3,719,972 $ 49,507 $ 46,272 $ 2 5,606,403 $ 2 3,766,244
Total percent change between
fiscal years 2003 and 2004 7.7 % 7.0 % 7.7 %
Governmental
Activities
Business- type
Activities Total
Major capital asset activity includes additions to the State highway
system ($ 1.2 billion), right- of- way acquisitions ($ 510 million), and the
acquisition/ construction of correctional facilities ($ 239 million).
The largest component of capital assets is the State highway system and related right- of- ways. The
State has approximately a 78,615- mile highway system, making it the second largest State- maintained
highway system in the nation. The system continues to increase as roads are widened and new roads
and bridges are constructed.
The 2002- 2003 Session of the General Assembly authorized the issuance of up to $ 300 million of
special indebtedness to finance the repair and renovation of State facilities and related infrastructure
that are supported by the State’s General Fund. Of the $ 300 million, approximately $ 157 million will
be allocated to the University of North Carolina System ( component unit). Each of the sixteen
constituent institutions of the UNC System will receive a portion of the proceeds for repairs and
renovations. The remaining $ 143 million of the proceeds will be used to make repairs and renovations
to various State facilities located throughout North Carolina. The State issued $ 125 million in
certificates of participation during the 2004 fiscal year to finance repair and renovation projects. At
year- end, the remaining authorization was $ 175 million. In addition, the most recent session of the
General Assembly ( 2003- 2004) directed the transfer on June 30, 2004, of $ 76.8 million from the
unrestricted credit balance of the General Fund in fiscal year 2004 to the Repairs and Renovations
Reserve Account, to be applied to the repair and renovation of State and university facilities.
In July 2003, the N. C Infrastructure Finance Corporation ( Corporation), a blended component unit
of the State, acquired three close security correctional facilities by issuing $ 218.4 million in lease-purchase
revenue bonds. Also, during the fiscal year, the Corporation issued $ 158.96 million in
certificates of participation to construct and equip two close security correctional facilities and to begin
designing a third facility. The Department of Correction is undertaking construction initiatives to
address a cell shortfall and to allow for the implementation of sentencing reform. The State’s
correctional facility population has more than doubled since 1980. The rapid growth in inmates is
attributable to increases in the State’s population, increases in length of stay in correctional facilities,
and changes in criminal laws.
42 State of North Carolina
As further detailed in Note 19( F) to the financial statements, the State has commitments of $ 1.9
billion for the construction of highway infrastructure, which are expected to be financed by gasoline tax
collections and federal funds. Other commitments for the construction and improvement of State
government facilities totaled $ 522.9 million, which are expected to be financed primarily by debt
proceeds ( certificates of participation), State appropriations, and federal funds.
More detailed information about the State’s capital assets is presented in Note 5 to the financial
statements.
State of North Carolina 43
Long- term
Debt
At year- end, the State had total long- term debt outstanding of $ 5.54 billion, an increase of 34.9
percent from the previous fiscal year- end ( see table below).
Outstanding Debt as of June 30
( dollars in thousands)
2004 2003 2004 2003 2004 2003
General obligation bonds...................... $ 4,982,860 $ 4,066,990 $ — $ — $ 4,982,860 $ 4,066,990
Revenue bonds.................................... 218,405 — 9 ,325 9 ,570 227,730 9,570
Certificates of participation................... 301,165 17,500 — — 301,165 17,500
Notes payable...................................... 25,008 9,629 — — 25,008 9,629
Total.............................................. $ 5,527,438 $ 4,094,119 $ 9 ,325 $ 9 ,570 $ 5,536,763 $ 4,103,689
Total percent change between
fiscal years 2003 and 2004 35.0 % ( 2.6)% 34.9 %
Governmental
Activities
Business- type
Activities Total
The State’s general obligation bonds are secured by a pledge of the faith, credit, and taxing power of
the State. The revenue bonds issued by the State are secured solely by specified revenue sources. The
certificates of participation ( COPs) and lease- purchase revenue bonds issued by the N. C. Infrastructure
Finance Corporation, a blended component unit of the State, are secured by lease and installment
payments made by the State, and in the event of default, by a security interest in the leased facilities
pursuant to a leasehold deed of trust ( as applicable). The COPs issued for repair and renovation
projects ( see below) are not secured by a lien upon or security interest in the projects or any other
property of the State. All payments of the State for the COPs and the lease- purchase revenue bonds are
subject to appropriation by the General Assembly.
During the 2004 fiscal year, the State issued $ 1.159 billion in general obligations bonds ( excluding
refunding issues), $ 218.41 million in lease- purchase revenue bonds, and $ 283.96 million in certificates
of participation ( COPs). The new general obligation debt consisted of $ 708 million in public
improvement bonds ( consolidation of clean water bonds and higher education bonds), $ 400 million in
highway bonds, $ 36 million in natural gas bonds, and $ 15 million in clean water bonds. The proceeds
of the lease- purchase revenue bonds were used to acquire three close security correctional facilities in
Alexander, Anson, and Scotland counties. The proceeds of the COPs will be used to construct and
equip two close security correctional facilities in Greene and Bertie counties and to finance the cost of
design and certain additional costs of a third close security correctional facility in Columbus County.
The State also issued COPs for the repair and renovation of State facilities and related infrastructure
that are supported by the General Fund.
The State refinanced $ 336.9 million of its existing debt in 2004 to improve cash flow and to take
advantage of lower interest rates. By refinancing the debt, the State will reduce its future debt service
payments by approximately $ 13.5 million over the next ten years.
Higher Education Authorization
The 1999- 2000 Session of the General Assembly authorized the issuance of up to $ 3.1 billion of
higher education improvement bonds, which were subsequently approved by the voters of the State.
The $ 3.1 billion bond authorization represents the largest debt authorization in the State’s history. The
proceeds of these general obligation bonds will be used solely to construct new buildings and to
renovate and modernize existing buildings on the State's 58 community college and 16 University of
North Carolina campuses. These improvements are needed to meet enrollment demand and to ensure
that the State’s college and university buildings meet modern code requirements and are equipped to
prepare graduates for twenty- first century jobs. The bond legislation passed by the General Assembly
specifies the amount of bond funding that will flow to each community college and university campus.
At year- end, the authorized but unissued higher education bonds were $ 1.37 billion.
44 State of North Carolina
Recent Legislation and Studies
The most recent session of the General Assembly ( 2003- 04 Session) authorized the issuance of up to
$ 468 million of special indebtedness to finance vital State facilities for health care and biotechnology.
No more than $ 310 million of the special indebtedness may be issued during the 2004- 05 fiscal year.
The State is authorized to use special indebtedness to provide:
− $ 338 million for constructing five new projects in the University of North Carolina ( UNC) System.
These projects consist of a cancer center at UNC- Chapel Hill ($ 180 million), a cardiovascular
institute at East Carolina University ($ 60 million), a bioinformatics Center at UNC- Charlotte ($ 35
million), a pharmacy program facility at Elizabeth City State University ($ 28 million), and a health
center at UNC- Asheville ($ 35 million).
− $ 50 million for land acquisition and planning for five other projects in the UNC System;
− $ 35 million for constructing up to five youth development centers;
− $ 45 million for capital projects within the State Parks System, including repairs and renovations of
park facilities and land acquisition. High priority uses of the debt proceeds include acquiring land
near military bases to prevent encroachment.
The fiscal impact of the $ 468 million of special indebtedness on the General Fund is expected to be
zero because of the annual transfer of revenue from other sources to the General Fund in an amount to
cover the estimated debt service. The debt service for the UNC System facilities and the youth
development centers will be reimbursed from the Health and Wellness Trust Fund and the Tobacco
Trust Fund ( special revenue funds). The debt service for the parks projects is fully funded by the
streams of revenue available to the Parks and Recreation Trust Fund, the Natural Heritage Trust Fund,
and the Clean Water Management Trust Fund ( special revenue funds). The maximum annual debt
service is estimated to be $ 47.4 million in fiscal year 2010- 11. The total interest on the $ 468 million of
debt is estimated to be $ 310 million.
Special indebtedness is non- voted debt that is generally secured only by an interest in State property
being acquired or improved ( e. g., certificates of participation and lease- purchase revenue bonds). With
this type of debt, there is no pledge of the State’s faith, credit or taxing power to secure the debt, which
is why voter approval is not required. If the State defaulted on its repayments, no deficiency judgment
could be rendered against the State, but the State property that serves as security could be disposed of to
generate funds to satisfy the debt. Failure to repay the debt would have negative consequences for the
State’s credit rating. Article 9 of Chapter 142 of the General Statutes prohibits the issuance of special
indebtedness except for projects specifically authorized by the General Assembly. The use of
alternative financing methods provides financing flexibility to the State and permits the State to take
advantage of changing financial and economic environments.
During the 2003- 04 Session, the General Assembly created a Debt Affordability Advisory
Committee ( Committee) to annually advise the Governor and the General Assembly on the estimated
debt capacity of the State for the upcoming ten fiscal years. The Committee is responsible for preparing
an annual debt affordability study and establishing guidelines for evaluating the State’s debt burden.
The Committee is required to report its findings and recommendations to the Governor, the General
Assembly, and the Fiscal Research Division of the General Assembly by February 1 of each year.
In April 2004, the State Treasurer presented to the House and Senate Finance Committees of the
General Assembly, the second Debt Affordability Study for North Carolina. It provides a methodology
for measuring, monitoring, and managing the State’s debt capacity. The study evaluated the State’s
current and projected debt burden using indicators such as tax- supported debt to personal income, debt
per capita, debt service to tax revenue, and rapidity of principal repayment ratios. In addition, the report
includes several recommendations based on the results of the study. According to the report, all of the
State’s debt ratios are below median levels for all fifty states, as compiled by Moody’s Investors
Service, and for a peer group of seven states rated triple AAA by all three credit rating agencies. Thus,
the study concludes that the State’s debt is considered low and is manageable at the current level.
However, due to the projected issuance of $ 2.2 billion of tax- supported debt over the next three years
State of North Carolina 45
( 62 percent for higher education purposes), all of the State’s debt ratios are expected to increase over
this period. The State Treasurer noted in the report that credit rating agencies consider a debt
affordability study as a positive factor when evaluating issuers and assigning credit ratings.
Credit Ratings
Credit ratings are the rating agencies’ assessment of a governmental entity’s ability and willingness
to repay debt on a timely basis. Credit ratings are an important factor in the public credit markets and
can influence interest rates a borrower must pay.
The State’s general obligation bonds are rated “ AAA” by Fitch Ratings, “ Aa1” with a positive
outlook by Moody’s Investors Service ( Moody’s) and “ AAA” with a stable outlook by Standard &
Poor’s Ratings Services. All three agencies base their prime ratings on the State’s strong, diverse
economic base, its sound financial management, and low debt levels. In September 2004, Moody’s
revised the State’s outlook to positive from stable and noted the following:
“ This rating reflects the State’s slowly stabilizing economy, its improving tax revenues, its
conservative debt policy, and its effective financial management. While general fund balances
remain negative, flexible cash reserves outside the general fund are ample, and pension funding
is exceptionally strong. Moody’s expects that the state will continue to take actions to restore
structural balance and rebuild reserves.”
In August 2002, Moody’s downgraded the State’s credit rating for general obligation debt from
“ AAA” to “ Aa1”, representing the first time since 1960 that North Carolina had less than a “ AAA”
rating. While Moody’s praised the strength of executive powers available to insure a balanced budget,
it advised that the primary reasons for the downgrade were the State’s continued budget pressure,
reliance on non- recurring revenues, and weakened balance sheet. Also, Moody’s commented that the
task of restoring structural budget balance and rebuilding reserves faces political and economic
obstacles.
The certificates of participation and lease- purchase revenue bonds issued by the North Carolina
Infrastructure Finance Corporation are rated “ AA+” by Standard & Poor’s, “ AA” by Fitch, and “ Aa2”
by Moody’s.
Limitations on Debt
The Constitution of North Carolina ( Article 5, Section 3) imposes limitations upon the increase of
certain State debt. It restricts the General Assembly from contracting debts secured by a pledge of the
faith and credit of the State, unless approved by a majority of the qualified voters of the State, except
for the following purposes:
1. To fund or refund a valid existing debt;
2. To supply an unforeseen deficiency in the revenue;
3. To borrow in anticipation of the collection of taxes due and payable within the current fiscal year to
an amount not exceeding 50 percent of such taxes;
4. To suppress riots or insurrections; or to repel invasions;
5. To meet emergencies immediately threatening the public health or safety, as conclusively
determined in writing by the Governor; and
6. For any other lawful purpose, to the extent of two- thirds of the amount by which the State’s
outstanding indebtedness shall have been reduced during the next preceding biennium.
More detailed information about the State’s long- term liabilities is presented in Note 7 to the
financial statements.
46 State of North Carolina
Budget and
Economic
Update
The General Fund budget for 2004- 05 was signed into law on July 20, 2004. The enacted budget
was founded upon an overall nominal ( real growth plus inflation) economic growth rate of 5.5 percent
for 2004- 05. The budget continues the State sales and use tax rate at 4.5 percent and the 8.25 percent
income tax bracket for fiscal year 2004- 05 ( Note: the half- cent sales tax increase and the high income
tax bracket are scheduled to sunset at the end of the year), diverts a portion of the national tobacco
settlement payments ($ 60 million), and uses monies left over at the end of the 2003- 04 fiscal year
($ 289.4 million). It also earmarked an additional $ 116.7 million for the Rainy Day Fund and $ 76.8
million for the Repair and Renovation Reserve, indicating the State’s intention to continue to replenish
its reserves.
The 2004 hurricane season produced six tropical systems that directly impacted North Carolina.
Federal, State, and local emergency management officials estimate that these storms caused over $ 200
million in damages that are eligible for governmental assistance. Assistance is for a variety of services
including emergency protective measures, repair and replacement of homes, debris removal, stream
clearance, and bridge repair and replacement. In order to match federal funds available to North
Carolina for federal disaster recovery services, the Governor ordered State agencies to revert 0.75
percent of their 2004- 05 budgets to provide an estimated $ 120 million for storm relief. Special
exemptions are allowed for constitutionally mandated programs as well as emergency situations related
to law enforcement, health care, and public safety.
North Carolina’s seasonally adjusted unemployment rate as of September 2004 was 4.8 percent,
more than a half a percentage point lower than the national unemployment rate of 5.4 percent.
September was the seventh consecutive month that the State’s unemployment rate was below the
national average. For comparison, the State and national unemployment rates as of September 2003
were 6.4 percent and 6.1 percent, respectively.
2004- 05 Revenue Update ( Cash Basis)
For the first three months of the 2004- 05 fiscal year, General Fund revenues, ( tax and non- tax
revenues) came in $ 74.3 million higher than the $ 3.5 billion forecast for the period. A continuation of
the current trend would lead to revenue growth of 7.6 percent for the full year versus the 5.5 percent
economic growth rate built into the budget. However, an analysis of the collection detail reveals that
the improvement is not broad- based. Of the extra collections, $ 65.1 million came from one source,
corporate income taxes. While other taxes are also increasing, the net surplus from other revenues is
only $ 8.8 million. Additionally, $ 30 million of the extra corporate collections is the result of a one- time
settlement in August 2004 of a long- standing corporate tax dispute not directly related to the economy.
Also, $ 31.8 million of the corporate surplus came from a 33 percent rise in September 2004 payments.
This rise is in contrast to the 10.2 percent decline in June and the 2.7 percent drop in April ( April, June,
and September are major corporate collection months). Because of the volatility of the corporate
income tax, it will be difficult for the State to maintain this growth as higher interest rates and increased
energy costs impact the economy
Other taxes are increasing but at different rates. The withholding of individual income tax receipts
are $ 18.2 million behind schedule for the first quarter ( 4.6 percent growth versus budgeted rate of 5.7
percent). The primary factor is sluggish job growth. State and local sales tax collections rose by 8.2
percent for the July to September 2004 quarter versus the 6.1 percent projection for the period.
However, the rate of growth slowed to 6.7 percent for September from almost 10 percent in August.
The impact of recent hurricanes has taken a severe toll on certain areas of the State. The effect on
State and local revenues is hard to measure. In a typical disaster event, the front- end loss in
withholding and sales tax revenue is eventually offset by gains during the recovery period due to
reconstruction efforts and the makeup of lost production.
The improving revenue picture, though not as broad- based or as strong during prior recoveries, is
dampened by the State’s $ 1.1 billion structural budget gap for the 2005- 06 fiscal year. The gap is due
to a combination of tax increases that will expire ($ 525 million), one- time transfers used to balance the
2003- 04 and the 2004- 05 budgets, and one- time budget cuts. The budget gap numbers for North
Carolina are typical of other states following the severe 2001- 03 recession.
State of North Carolina 47
Conditions
Expected to
Impact
Future
Operations
The North Carolina Retirement System has identified major issues that will have a significant
impact on the State’s fiscal condition.
Demographic Factors: The Baby Boomers
The process of retirement for the demographic cohort known as the “ Baby Boomers” will have
tremendous economic, social, and political impact in North Carolina.
Two critical areas in which the “ Boomer” retirement will be significantly consequential are: A)
public sector workforce, and B) the cost to the State of providing retirement benefits.
Workforce Impact:
• The Baby Boomers are an eighteen- year cohort, currently between forty ( 40) and fifty- eight
( 58) years of age.
• In North Carolina this cohort constitutes approximately 59 percent of the State’s public
workforce. Impact: the State’s public sector workforce will have to be replenished as this
cohort moves into retirement.
• Further, replacement personnel will be drawn from a shrinking pool of workers made up of
considerably smaller generations than the boomer predecessors. Impact: the State will be
faced with an increasingly competitive labor market.
• Implications: North Carolina will have to address these impacts by one or more of the
following: expand its efforts to retain aging boomers in the public sector and thus slow the
rate of retirement, or become more competitive in the labor market in order to recruit
workers to State employment or reduce the number of public sector positions.
Providing Retirement Benefits:
• The first year of the eighteen ( 18) year boomer cohort has just reached the average age of
retirement in the State system for 2003, which is aged 58 ½ . Impact: the first of the Boomer
cohort is on the cusp of retirement, marking the beginning of boomer retirement from the
North Carolina public sector.
• The total number of retirees in the North Carolina Teachers’ and State Employees’ Retirement
System will increase 135% through 2022 ( the total increase for both the State and the Local
government systems is 141%). Impact: the cost to the State of providing retirement
benefits will increase. ( Note: Increasing costs are not driven by the cost of providing an actual
pension as employees and employers fund the pension over the employee’s service career. The
increase in cost will come from administrative expenses and the cost of providing Cost of
Living Adjustments ( COLAs) for a significantly larger retiree pool.)
• While a set rate for Cost of Living Adjustments ( COLA) is not specified in statute, the State has
historically provided retirees with an annual COLA that matches the Consumer Price Index
( CPI). Impact: if the State continues to provide a COLA to retirees, expenditures from
the General Fund will have to increase to cover the cost of providing such COLAs for an
increasing pool of retirees.
• Implications: to be competitive in tomorrow’s labor market, North Carolina will have to
continue to provide attractive benefits such as the State’s retirement plan; this will occur
during a time when system administration and COLAs costs will increase significantly as
the number of retirees exponentially expands.
Retiree Health Care
The Governmental Accounting Standards Board ( GASB) reporting guidelines that will require
disclosure of the State’s liabilities for retiree health care costs ( i. e., GASB Statements No. 43 and 45) is
one of the State’s largest looming fiscal items. The Retirement System facilitates the benefit by making
the deduction for the State Health Plan from retirees’ pension checks. The Retirement System is also
the front line organization for retirees who want to voice their concerns about changes, or potential
changes, to benefits. Ultimately, the provision of health care for the State’s public sector retirees is the
responsibility of the State Health Plan. The unfunded actuarial liability for retiree health care is
substantial because of the State’s policy of funding these benefits on a pay- as- you- go basis.
48 State of North Carolina
In preparation for the new GASB standards on other postemployment benfits, the North Carolina
General Assembly enacted legislation in 2004 establishing a Retiree Health Benefit Fund. The State’s
contributions to this fund are irrevocable, and the assets of the fund are not subject to the claims of the
State’s creditors. More detailed information about the State’s obligations for Retiree Health Care is
presented in the Letter of Transmittal.
In addition, the announcement of a new computer manufacturing facility by Dell, Inc. is expected to
impact future operations.
Dell Manufacturing Facility
In November 2004, Governor Michael F. Easley announced that Dell, Inc. ( Dell) will build a
computer manufacturing facility in North Carolina. Dell, a leading manufacturer and distributor of
computers and related products, plans to build and equip a state- of- the- art, 400,000- square- foot
manufacturing and distribution facility in the Piedmont Triad region. Dell currently has two U. S.
factories in Nashville, Tennessee and Austin, Texas. The North Carolina General Assembly convened a
one- day special session on November 4, 2004 an approved an economic incentive for computer
manufacturing companies that in the case of Dell, will provide up to $ 225 million in tax credits over the
next fifteen years. For each year in which Dell meets the required performance targets, the State will
provide a grant equal to 75 percent of the State personal income withholding taxes derived from the
creation of new jobs.
Requests for Information
This financial report is designed to provide our citizens, taxpayers, customers, and investors and
creditors with a general overview of the State’s finances and to demonstrate the State’s accountability
for the money it receives. If you have questions about this report or need additional financial
information, contact the North Carolina Office of the State Controller, Accounting and Financial
Reporting Section, 1410 Mail Service Center, Raleigh, N. C. 27699- 1410. In addition, this financial
report is available on the Office of the State Controller’s Internet home page at
http:// www. ncosc. net/ financial/ financial. html.
BASIC
FINANCIAL
STATEMENTS
50 State of North Carolina
THIS PAGE INTENTIONALLY LEFT BLANK.
GOVERNMENT- WIDE
FINANCIAL
STATEMENTS
52 State of North Carolina
STATEMENT OF NET ASSETS
June 30, 2004 Exhibit A- 1
( Dollars in Thousands)
Primary Government
Governmental Business- type Component
Activities Activities Total Units
ASSETS
Cash and cash equivalents ( Note 3)................................ $ 4,105,858 $ 249,802 $ 4,355,660 $ 2,700,361
Investments ( Note 3)........................................................ 499,164 38,409 537,573 2,050,256
Securities lending collateral ( Note 3)................................ 3,426,369 193,909 3,620,278 —
Receivables, net ( Note 4).................................................. 2,051,983 297,705 2,349,688 735,038
Due from component units ( Note 17)................................ 18,202 — 18,202 55,833
Due from primary government ( Note 17).......................... — — — 276,402
Internal balances............................................................... ( 58) 58 — —
Inventories......................................................................... 150,730 485 151,215 69,786
Prepaid items.................................................................... 12,337 1,845 14,182 13,854
Advances to component units ( Note 17)........................... 24,242 — 24,242 —
Notes receivable, net ( Note 4).......................................... 282,678 435,220 717,898 2,890,667
Endowment investments ( Note 3)..................................... 55,211 — 55,211 1,715,044
Investment in joint venture................................................ — — — 8,319
Deferred charges.............................................................. — 118 118 20,661
Securities held in trust....................................................... 41,638 — 41,638 —
Pension assets ( Note 11).................................................. 278 — 278 —
Capital assets- nondepreciable ( Note 5)............................ 9,947,437 27,096 9,974,533 1,608,640
Capital assets- depreciable, net ( Note 5)........................... 15,609,459 22,411 15,631,870 5,068,825
Total Assets ..................................................................... 36,225,528 1,267,058 37,492,586 17,213,686
LIABILITIES
Accounts payable and accrued liabilities.......................... 1,239,924 24,067 1,263,991 549,345
Medical claims payable..................................................... 762,427 — 762,427 7,308
Unemployment benefits payable....................................... — 20,048 20,048 —
Tax refunds payable.......................................................... 1,056,880 — 1,056,880 —
Obligations under securities lending................................. 3,426,369 193,909 3,620,278 —
Interest payable................................................................. 57,931 35 57,966 24,201
Short- term debt ( Note 6)................................................... — 251,759 251,759 2

NORTH
CAROLINA
COMPREHENSIVE
ANNUAL
FINANCIAL
REPORT
FOR THE FISCAL YEAR
ENDED JUNE 30, 2004
MICHAEL F. EASLEY
GOVERNOR
ROBERT L. POWELL
STATE CONTROLLER
Prepared by Statewide Accounting Division
Office of the State Controller
http:// www. ncosc. net/
2 State of North Carolina
This report was prepared by the
Statewide Accounting Division of the North Carolina Office of the State Controller.
John Barfield, CPA
ASSISTANT STATE CONTROLLER
jbarfield@ ncosc. net
Anne Godwin, CPA
Statewide Accounting and Financial Reporting Manager
agodwin@ ncosc. net
Amber Young
Central Compliance Manager
ayoung@ ncosc. net
Statewide Accounting Division Staff
Robert Alford, CPA Martha Hunt, CPA Cindy Salgado, CPA
Ann Anderson Cathy Johnson Melody Tart
Angela Clark Darlene Langston, CPA Shirley Trollinger
John Eliadis Michelle Lassiter Cynthia Vincent
Pam Fowler, CPA Clayton Murphy, CPA Helen Vozzo, CPA
Luke Harris Terri Noblin, CPA Virginia Warren
Special appreciation is given to the chief fiscal officers and the dedicated accounting personnel throughout the State.
Their efforts to contribute accurate and timely financial data for their agencies, universities, community colleges, and
institutions made this report possible.
State of North Carolina 3
MICHAEL F. EASLEY
Governor of North Carolina
4 State of North Carolina
TABLE OF CONTENTS
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2004
INTRODUCTORY SECTION
Letter of Transmittal.................................................................................................................... ............................................................................................ 8
Certificate of Achievement for Excellence in Financial Reporting...................................................................................................................... ................... 19
Organization of North Carolina State Government, including principal State officials........................................................................................................... 20
FINANCIAL SECTION
Report of Independent Auditor........................................................................................................................ ........................................................................ 24
Management's Discussion and Analysis....................................................................................................................... ........................................................... 28
Basic Financial Statements
Government- wide Financial Statements
Statement of Net Assets — Exhibit A- 1.............................................................................................................................. .................................................... 52
Statement of Activities — Exhibit A- 2.............................................................................................................................. ..................................................... 54
Fund Financial Statements
Balance Sheet— Governmental Funds — Exhibit B- 1.............................................................................................................................. ............................... 58
Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Exhibit B- 1a............................................................................ 59
Statement of Revenues, Expenditures, and Changes in Fund Balances— Governmental Funds — Exhibit B- 2...................................................................... 60
Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances
of Governmental Funds to the Statement of Activities — Exhibit B- 2a........................................................................................................................... 61
Statement of Net Assets— Proprietary Funds — Exhibit B- 3.............................................................................................................................. ................... 62
Statement of Revenues, Expenses, and Changes in Fund Net Assets— Proprietary Funds — Exhibit B- 4.............................................................................. 63
Statement of Cash Flows— Proprietary Funds — Exhibit B- 5.............................................................................................................................. .................. 64
Statement of Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 6.............................................................................................................................. ...... 66
Statement of Changes in Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 7............................................................................................................. 67
Notes to the Financial Statements..................................................................................................................... ....................................................................... 70
Required Supplementary Information
Schedules of Funding Progress— All Defined Benefit Pension Trust Funds.......................................................................................................................... 150
Schedule of Contributions from the Employers and Other Contributing Entities— All Defined Benefit Pension Trust Funds.............................................. 151
Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances— Budget and Actual
—( Budgetary Basis— Non- GAAP) General Fund........................................................................................................................... ................................ 152
Notes to Required Supplementary Information— Budgetary Reporting...................................................................................................................... ............ 153
Combining Fund Statements and Schedules
Nonmajor Governmental Funds
Combining Balance Sheet— Nonmajor Governmental Funds — Exhibit C- 1.......................................................................................................................... 160
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Governmental Funds — Exhibit C- 2.................................. 161
Combining Balance Sheet— Nonmajor Special Revenue Funds — Exhibit C- 3...................................................................................................................... 164
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Special Revenue Funds — Exhibit C- 4.............................. 168
Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances
— Budget and Actual ( Budgetary Basis— Non- GAAP) Nonmajor Special Revenue Funds — Exhibit C- 5................................................................ 172
Combining Balance Sheet— Nonmajor Capital Projects Funds — Exhibit C- 6....................................................................................................................... 178
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Capital Projects Funds — Exhibit C- 7............................... 179
Combining Balance Sheet— Nonmajor Permanent Funds — Exhibit C- 8.............................................................................................................................. 182
Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Permanent Funds — Exhibit C- 9....................................... 183
Proprietary Funds
Nonmajor Enterprise Funds
Combining Statement of Net Assets— Nonmajor Enterprise Funds — Exhibit D- 1................................................................................................................ 188
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Nonmajor Enterprise Funds — Exhibit D- 2........................................... 189
Combining Statement of Cash Flows— Nonmajor Enterprise Funds — Exhibit D- 3.............................................................................................................. 190
Internal Service Funds
Combining Statement of Net Assets— Internal Service Funds — Exhibit E- 1......................................................................................................................... 192
Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Internal Service Funds — Exhibit E- 2.................................................... 194
Combining Statement of Cash Flows— Internal Service Funds — Exhibit E- 3....................................................................................................................... 196
Fiduciary Funds
Combining Statement of Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 1............................................................................................... 202
Combining Statement of Changes in Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 2....................................................................... 203
Combining Statement of Changes in Assets and Liabilities— Agency Funds — Exhibit F- 3.................................................................................................. 206
State of North Carolina 5
Comprehensive Annual Financial Report
For the Fiscal Year Ended June 30, 2004
Nonmajor Component Units - Discretely Presented
Combining Statement of Net Assets— Nonmajor Component Units — Exhibit G- 1............................................................................................................... 212
Combining Statement of Activities— Nonmajor Component Units — Exhibit G- 2................................................................................................................ 213
STATISTICAL SECTION
Revenues by Source and Expenditures by Function— All Governmental Fund Types ( GAAP Basis) — Table 1................................................................... 216
Schedule of Revenues by Source— General Fund ( GAAP Basis) — Table 2.......................................................................................................................... 218
General Obligation Bonds Debt Ratios — Table 3.............................................................................................................................. .................................... 220
Revenue Bond Coverage — Table 4.............................................................................................................................. .......................................................... 221
Schedule of General Obligation Bonds Payable — Table 5.............................................................................................................................. ...................... 222
Schedule of Special Obligation Debt — Table 6.............................................................................................................................. ....................................... 228
Statewide Assessed Property Values— Real Property, Tangible Personal Property and Public Service Companies — Table 7............................................. 229
Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina — Table 8............................................................... 230
Cash Receipts from Farming by Commodities — Table 9.............................................................................................................................. ........................ 231
Major Private Employers in North Carolina — Table 10............................................................................................................................. ........................... 232
Schedule of Demographic Data — Table 11............................................................................................................................. .............................................. 234
Ten Largest Non- Agricultural Industries by Number of Employees — Table 12.................................................................................................................... 236
Total Number of State Government Permanent Positions Funded in the State Budget by Agency — Table 13...................................................................... 237
Required Supplementary Information— Ten- Year Claims Development Information — Public School Insurance Fund — Table 14................................... 238
Schedule of Miscellaneous Statistics — Table 15............................................................................................................................. ...................................... 240
6 State of North Carolina
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INTRODUCTORY
SECTION
State of North Carolina
Office of the State Controller
Michael F. Easley, Governor Robert L. Powell, State Controller
MAILING ADDRESS
1410 Mail Service Center
Raleigh, NC 27699- 1410
Telephone: ( 919) 981- 5454
Fax Number: ( 919) 981- 5567
State Courier: 56- 50- 10
LOCATION
3512 Bush Street
Raleigh, NC
Website: www. ncosc. net
An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer
The Honorable Michael F. Easley, Governor
Members of the North Carolina General Assembly
Citizens of North Carolina
It is our pleasure to furnish you with the 2004 Comprehensive Annual Financial Report ( CAFR) of the State of North
Carolina in compliance with G. S. 143B- 426.39. This report has been prepared by the Office of the State Controller.
Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclo-sures,
rests with the State government and this office. To the best of our knowledge and belief, this financial report is
complete and reliable in all material respects. We believe all disclosures necessary to enable you to gain an understanding of
the State's financial activities have been included.
Although the State budgets and manages its financial affairs on the cash basis of accounting, G. S. 143- 20.1 requires the
Office of the State Controller to prepare a comprehensive annual financial report ( CAFR) in accordance with generally
accepted accounting principles in the United States of America ( GAAP). Except for exhibits and notes clearly labeled
otherwise, this CAFR has been prepared in accordance with GAAP.
For the convenience of users we have divided this comprehensive annual financial report into three major sections,
described as follows:
• The introductory section includes this transmittal letter and the State's organization chart, including a listing of principal
State officials.
• The financial section includes management discussion and analysis, the basic financial statements ( government- wide
financial statements, fund financial statements, and notes), other required supplementary information, the combining and
individual fund financial statements, and schedules.
• The statistical section includes selected financial, non- financial and demographic information, much of which is
presented on a ten- year basis, as well as required supplementary information.
Management of the government is responsible for establishing and maintaining an internal control structure designed to
ensure that the assets of the State are protected from loss, theft or misuse and to ensure that adequate accounting data are
compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The
internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The
concept of reasonable assurance recognizes that: ( 1) the cost of a control should not exceed the benefits likely to be derived,
and ( 2) the valuation of costs and benefits requires estimates and judgments by management.
GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and
Local Governments, requires that management provide a narrative introduction, overview and analysis to accompany the Basic
Financial Statements in the form of management discussion and analysis ( MD& A). This letter of transmittal is intended to
complement MD& A and should be read in conjunction with it. The MD& A can be found immediately following the
Independent Auditor’s Report.
State of North Carolina 9
Profile of the Government
The State of North Carolina entity as reported in the CAFR includes all fund types of the
departments, agencies, boards, commissions and authorities governed and legally controlled by
the State's executive, legislative and judicial branches. In addition, the reporting entity includes
legally separate component units for which the State is financially accountable. The component
units are discretely presented in the government- wide financial statements. The State's
discretely presented major component units are the University of North Carolina System; the
State's community colleges; Golden LEAF, North Carolina Housing Finance Agency, and North
Carolina State Education Assistance Authority. The criteria for inclusion in the reporting entity
and its presentation are defined by the Governmental Accounting Standards Board ( GASB) in
its GASB Codification Section 2100. These criteria are described in Note 1 of the
accompanying financial statements.
The State and its component units provide a broad range of services to its citizens,
including public education; higher education; health and human services; economic
development; environment and natural resources; public safety, corrections, and regulation;
transportation; agriculture; and general government services. The costs of these services are
reflected in detail and in summary in this report.
In addition to internal controls discussed previously, the State maintains budgetary
controls. The objective of these budgetary controls is to ensure compliance with legal
provisions embodied in the annual appropriated budget approved by the General Assembly.
Activities of the General Fund and most departmental special revenue funds are included in the
annual appropriated budget. The State Highway Fund and the Highway Trust Fund, the State's
major special revenue funds, are primarily budgeted on a multi- year basis. Capital projects are
funded and planned in accordance with the time it will take to complete the project. The level of
budgetary control ( that is, the level at which expenditures cannot legally exceed the appropriated
amount) is exercised at both the departmental and university level by way of quarterly
allotments, with allotment control exercised by the State Controller, and on the program line-item
levels requiring certain approvals by the Director of the Budget. Legislative authorization
of departmental expenditures appears in the State Appropriation Bill. This " Certified Budget" is
the legal expenditure authority; however, the Office of State Budget and Management ( OSBM)
may approve executive changes to the legal budget as allowed by law. This results in the " Final
Budget" presented in the required supplementary information.
State Reporting
Entity and
Its Services
Budgetary
Control
10 State of North Carolina
Economic Condition and Outlook
After experiencing robust growth during the first half of the 2004 calendar year, the
nation’s economy is now working through what is commonly referred to as a “ soft patch”. This
weakness is due to a combination of record energy prices ( in actual dollars) and periodic
warnings of potential terrorist activity. An additional issue has to do with the fact that the
stimulus from three federal tax packages enacted in recent years is starting to run out.
2001- 02 2002- 03 2003- 04 2004- 05
Actual Actual Actual Projected
U. S. INDICATORS
Real Economic Growth* 0.8% 2.3% 4.4% 3.5%
Nonfarm Employment - 1.0% - 0.6% 0.2% 1.7%
Personal Income 2.0% 2.1% 4.7% 4.9%
Industrial Production - 3.5% 0.5% 2.4% 4.4%
Corporate Profits ( Pre- Tax) - 8.6% 17.3% 15.2% 12.1%
Short- Term Interest Rates
( Actual Rate) 2.3% 1.4% 1.0% 2.0%
Mortgage Rates ( Actual Rate) 6.9% 6.0% 5.7% 6.1%
Inflation ( CPI) 1.8% 2.2% 2.2% 2.5%
* Adjusted for inflation.
It will be interesting to see how the current weakness affects the speed with which the
Federal Reserve ratchets up interest rates. As recently as last winter many observers felt that the
tenuous nature of the recovery would eliminate any rate hikes during 2004. Fed officials even
confirmed this operating strategy in unusually candid public remarks.
However, strong growth during the first few months of the year led to a re- examination of
the position last spring. After raising the benchmark federal funds rate from .75% to 1% on
June 30 and to 1.25% in August, the Federal Reserve is now signaling additional rate hikes will
take place at a “ measured” pace. The message to be gleaned from the Fed’s language is that
future actions will depend on how the economic data falls out. The recent weakness may cause
monetary officials to hold off on the anticipated September increase, especially in light of their
pronouncements about the impact of high energy prices.
In any case, the die has been cast and rates will rise over the next couple of years. During
the 1994 tightening, short term borrowing rates rose from 3% to 6% in a 13- month period.
Economy. com, the forecasting firm used by Fiscal Research, expects the rates to rise to 2.0% by
the first quarter of 2005 and to top out at 5.0% during the first quarter of 2007. The forecasting
firm used by the Office of State Budget and Management, Global Insight Inc., is also expecting
a 2.0% rate by the end of this year, rising to 3.5% by 2006.
National
Economic
Outlook
State of North Carolina 11
A continuing problem for the economy is the subpar recovery in jobs. This is due to a
combination of the movement of jobs overseas and the reticence of employers to ramp up
staffing levels in an atmosphere of uncertainty. North Carolina is on the front line of this shift,
due in part to NAFTA. This impact had begun well before the 2001 recession, as shown by the
job growth data below:
N. C. Employment Growth
In Selected Major Sectors
Year Manufacturing Finance Services
1994 0.5% 1.2% 7.6%
1995 0.5% 1.9% 4.5%
1996 - 1.7% 8.2% 4.5%
1997 - 1.0% 7.4% 5.7%
1998 - 0.5% 5.3% 6.0%
1999 - 2.5% - 0.4% 6.0%
2000 - 2.4% 0.7% 3.3%
2001 - 7.1% 4.6% 1.4%
2002 - 8.6% .7% 1.1%
2003 - 6.1% 1.5% .7%
A second issue has to do with the impact of higher energy prices on consumer spending.
From late winter 1999 to early summer 1999, gas prices in North Carolina rose from around 80
cents per gallon to $ 1.00, and to $ 1.25 by early 2000. Once motorists realized that the increase
might be more than a temporary spike, they cut back on purchases of other items ( except for
vehicles).
One way to measure this impact is to look at gross state and local sales tax collections.
After rising 8.6% for the second quarter of 1999, the rate of increase fell to 6.3% for the third
quarter, 5.4% for the fourth quarter, and to 4.5% by the first quarter of 2000. This problem was
compounded by the fact that heavy promotional activity by auto dealers propped up car sales.
The net result of these factors meant that the additional dollars going to vehicle purchases and
energy costs “ crowded out” spending on other items.
So far the impact of higher energy prices in 2004 on the overall economy and retail sales
has been muted. For one thing, the recovery in equity prices has enhanced the “ paper wealth” of
many investors. In addition, the substitution of natural gas and other energy sources for fuel oil
has minimized the impact of higher fuel prices on manufacturing production costs and family
budgets. A third factor is the cash received by homeowners who have refinanced their
mortgages.
A concern is that financing for retail activity may be coming from additional credit card
usage and such levels cannot be sustained indefinitely. A measure of this issue is the fact that
unlike the 1992- 94 recovery, sales tax collections are growing much faster than withholding tax
receipts.
Due to this concern and the phase out of the impact of the 2001- 03 federal tax cuts, the
underlying national economic assumptions used in the budget reflect the expectation that growth
will slow during the 2004- 05 fiscal years.
One of the primary characteristics of the 2001 recession was the impact on the
manufacturing sector. This is important to North Carolina because 15% of our nonagricultural
employment is in manufacturing versus 11% for the U. S. A more important measure is the
share of Gross State Product represented by manufacturing: 21% in North Carolina versus 16%
for the nation.
State
Prospects
12 State of North Carolina
The loss of manufacturing jobs did not begin with the 2001 recession. Data compiled by
the Employment Security Commission indicate that manufacturing experienced a fairly rapid
recovery from the 1990- 91 recession, with employment growth of 2.6% in 1993. In fact, the
“ boom and bust” nature of manufacturing is one reason why the state’s economy grew 33%
faster than the national experience following the 1981- 82 recession and 45% quicker following
the Gulf War downturn. Expressed another way, North Carolina was the fifth fastest growing
state during the 1992- 93 period in terms of personal income, due in part to the recovery in
manufacturing.
After a leveling off period, manufacturing employment began a steady decline in mid- 1995
due to the mild national economic slowdown and the kicking in of NAFTA. The rate of decline
began to accelerate in February 2001 and peaked at an 8.6% rate in 2002. Particularly hard hit
were the textile and apparel sectors, with North Carolina jobs in these sectors dropping over
15% on a year- over- year basis by the spring of 2001. While the rate of decline has slowed due
to the start of the economic recovery, the erosion continues. The only saving grace is that the
loss of traditional jobs has been so great that these sectors exert a much smaller impact on the
overall economy than in the past.
For the 2004- 05 fiscal year, we are budgeting on the basis of a continued subpar economic
recovery in North Carolina, both in terms of the absolute level and the normal growth premium
relative to the U. S. This experience would be very different from the explosive growth in the
state’s economy during the last two recoveries.
2001- 02 2002- 03 2003- 04 2004- 05
Actual Actual Actual Projected
NORTH CAROLINA INDICATORS
Personal Income 2.2% 2.3% 5.2% 5.5%
Nonfarm Employment - 2.1% - 1.1% 0.1% 2.1%
Unemployment Rate ( Actual Rate) 6.5% 6.5% 6.0% 5.4%
Average Hourly Earnings
( Manufacturing) 2.6% 2.6% 4.4% 3.2%
Retail Sales 2.5% 1.1% 6.7% 3.9%
Housing Activity 7.3% 6.1% 17.0% - 14.3%
Auto Sales - 5.5% - 1.4% 8.5% - 10.9%
— Economic analysis prepared by David Crotts
Fiscal Research Division
North Carolina General Assembly
October 29, 2004
Issues and Observations
During fiscal year 2004, the Governor, the General Assembly, and the departments and
agencies of State government worked to address key issues facing State government and the
citizens of North Carolina. More discussion of the financial issues of North Carolina can be
found in the Management’s Discussion and Analysis ( MD& A) section of this document.
Rising healthcare costs continue to be a concern throughout the State and the nation.
Healthcare costs impact State budget programs through increasing expenses not only in
Medicaid, but also in other State and federal healthcare programs. In recent years, adjustments
have been made to deductibles, co- payments, and benefits coverage under the State Health Plan
in an attempt to slow the growth of State budget healthcare costs.
Other Post-
Employment
Benefits
State of North Carolina 13
In light of the current and future concerns related to rising healthcare costs, the
Governmental Accounting Standards Board ( GASB) has been working on the issuance of
accounting and reporting standards for other post- employment benefits since the mid- 90’ s. In
April 2004, GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit
Plans Other Than Pension Plans ( effective for fiscal year 2006- 07), and in June 2004, GASB
issued Statement No. 45, Accounting and Financial Reporting by Employers for
Postemployment Benefits Other Than Pensions ( effective for fiscal year 2007- 08).
These new standards will require governmental employers to start accounting for the cost
of certain post employment benefits while employees are still working. Public sector employers
already accrue the cost of pensions as employees are working. These new standards will have a
significant impact for most state and local governments. In addition to pensions, many state and
local governmental employers provide other postemployment benefits ( OPEB) as part of the
total compensation offered to attract and retain the services of qualified employees. The cost of
these future benefits is a part of the cost of providing public services today. OPEB includes
postemployment healthcare, as well as other forms of postemployment benefits, such as life
insurance and disability. Currently, the State and most other governmental employers finance
OPEB plans on a pay- as- you- go basis. The financial statements generally do not report financial
effects of OPEB until the promised benefits are paid, often many years after the related
employee services are received.
These new GASB standards will improve the relevance and usefulness of financial
reporting by ( a) requiring systematic, accrual- basis measurement and recognition of OPEB cost
( expense) over a period that approximates employees’ years of service, and ( b) providing
information about actuarial accrued liabilities associated with OPEB and whether and to what
extent progress is being made in funding the plan. In addition, the proposed accounting change
would provide information useful in assessing potential demands on the employer’s future cash
flows.
In preparation for the implementation of these new standards, the General Assembly
through the 2004 Appropriations Act established the Retiree Health Benefit Trust Fund to hold
accumulated contributions from employers and any earnings on those contributions shall be
used to provide health benefits to retired and disabled employees and their applicable
beneficiaries. Employer contributions to the Fund are irrevocable. The assets of the Fund are
dedicated to providing health benefits to retired and disabled employees and their applicable
beneficiaries and are not subject to the claims of creditors of the employers making
contributions.
Three actuarial studies related to retiree healthcare have been completed as the State has
worked to get its hands around the issue and how to deal with it. Each of the three studies,
beginning in 1996, have reflected a substantial liability related to the State’s commitment to
provide healthcare to teacher and state employee retirees. The unfunded actuarial liability has
grown based on two formal studies from $ 5.4 billion in 1996, to $ 8.1 billion in 1999. More
recently, based on an informal estimate, the unfunded accrued liability may be in excess of $ 10
billion in 2004. This informal study does not reflect any changes that may arise in 2006 due to
the “ Medicare Prescription Drug, Improvements, and Modernization Act of 2003”.
Beginning in fiscal year 2006- 07, the actuarial data will be disclosed in the notes to the
State CAFR and will also be presented as Required Supplementary Information ( RSI). The
unfunded actuarial liability will not be recorded as an accounting liability but will be disclosed
in the notes to the financial statements, and as required supplementary information.
Beginning with the 2008 CAFR, the difference between the State’s contractual requirement
and the amount the State contributes or pays for retiree medical benefits will be recorded as an
accounting liability on the State’s government- wide financial statements.
14 State of North Carolina
The State’s largest OPEB plan, the Retiree Health Care Plan, is currently being funded on
a pay- as- you- go basis, resulting in a significant unfunded actuarial liability. The principal results
of the Plan’s most recent actuarial valuation are as follows:
Because the GASB’s proposed guidance on OPEB will significantly impact the State’s CAFR,
we have the following recommendations:
• The State needs to obtain an actuarial valuation for the retiree health plan at least
biennially. Annual valuations would be preferable for a state of our size, due to the
potential impact on teachers and state employees.
• On a prospective basis, the State should consider the long- term impact of the current
benefits structure as well as potential changes to that structure.
The 2004 General Assembly dedicated considerable time and effort into the evaluation of
current information technology management, organization, and operations at the statewide and
agency levels for North Carolina State government. The result of that evaluation was legislation
enacted in Senate Bill 991 that overhauled information technology authority by transferring it
from a central management committee to the Chief Information Officer for the State.
Senate Bill 991 provides for the abolishment of the Information Resources Management
Committee, the heretofore approval and oversight group for IT projects, and consolidated all
functions under the Chief Information Officer. These functions include:
• Responsibility for the review, approval and management of all IT
projects above an established threshold;
• The authority to proceed with an enterprise approach for
procurement of IT products and services and the authority to
implement such solutions;
• The responsibility for review and approval of all agency IT plans
and the development of a biennial State Information Technology
Plan for submission to the General Assembly;
• An assessment of the IT inventory throughout State government
and an assessment of the IT deficiencies along with a five year
plan for unmet needs;
• The creation of an Information Technology Fund that may be
used to meet statewide enterprise needs as approved by the
General Assembly; and
• The authority to establish IT standards statewide.
In short, the General Assembly adopted the proposal of the Governor to bring the management,
oversight and operations of information technology under the direct control of the Governor.
Included in Senate Bill 991 is the continuation of the State Business Infrastructure Program
( SBIP) that has been in progress since 2002. This project was authorized by the 2002 General
Assembly to evaluate the State’s core business functions and report back to the General
Assembly with an assessment and plan to address deficiencies. This activity occurred in two
phases that included an inventory and assessment, followed by a blueprint for addressing
priority deficiencies. The final report was presented to the 2004 General Assembly and funding
was authorized under Senate Bill 991 to proceed with the development of business requirements
for the most “ at risk” component of the study, Human Resources and Payroll ( HR/ Payroll).
Under the guidance of the Office of the State Controller, and in collaboration with the
State Personnel Officer, Chief Information Officer, and Deputy State Budget Officer, the
business development phase for HR/ Payroll is currently underway. This process is scheduled to
be completed by late Spring, at which time an RFP will be developed and the General Assembly
will be asked to consider funding for the implementation phase of this component of the SBIP.
Information
Technology
State of North Carolina 15
If funding is approved, the HR/ Payroll implementation will begin by late 2005 with an expected
implementation period of between 18 to 24 months.
Concurrent with this is the next phase of the SBIP, the development of a statewide data
warehouse for consolidation of information for use by state managers. The SBIP Program
Steering Committee will be considering a plan for moving forward with this component of the
SBIP within the next thirty to sixty days. Depending on the development plan, the data
warehouse project is expected to begin in early 2005.
Financial Information
The MD& A provides an overview of the State’s financial activities addressing both
governmental and business- type activities reported in the government- wide financial statements.
In addition, MD& A focuses on the State’s major funds: the General Fund, the Highway Fund
and the Highway Trust Fund.
The State contributes to the Teachers' and State Employees' Retirement System, the
Consolidated Judicial Retirement System, the Legislative Retirement System, the Firemen's and
Rescue Squad Workers' Pension Fund, the Supplemental Retirement Income Plan of North
Carolina, and the North Carolina National Guard Pension Fund. The Local Governmental
Employees' Retirement System is administered by the State but the State is not a participant.
The retirement systems experienced a total return from investments of 12.01% for the one-year
period, a return of 4.85% for the three- year period and a return of 4.18% for the five- year
period, ended June 30, 2004. These returns represent strong investment results, and reflect the
conservative asset allocation and attention to investment quality that have guided the plan’s
investment policy. The combined North Carolina Retirement Systems lead the nation in fiscal
health because of wise management, consistent state contributions and a conservative
investment strategy.
The Teachers' and State Employees' Retirement System ( TSERS), the largest of the
pension trust funds, continued to be fully funded, based on the December 31, 2003 actuarial
valuation. Specifically, the TSERS was funded at 108.1%, with the actuarial value of assets of
$ 45.118 billion exceeding the actuarial accrued liability of $ 41.734 billion by $ 3.384 billion at
December 31, 2003. Employer contributions to the TSERS increased by $ 55.8 million above
the prior fiscal year. Investment balances increased by $ 3.546 billion, or 8.21% above the prior
fiscal year, with a net investment income of $ 5.132 billion. The TSERS experienced a $ 149.3
million increase in benefit payments to retirees, an increase of 7.4% from fiscal year 2003.
The State's general obligation bonds are rated Aa1 by Moody's, AAA by Standard &
Poors, and AAA by Fitch. These favorable ratings have enabled the State to sell its bonds at
interest rates considerably below the Bond Buyer's Index, thereby providing substantial savings
to North Carolina taxpayers.
It is the policy of the State that all agencies, institutions, departments, bureaus, boards,
commissions and officers of the State shall devise techniques and procedures for the receipt,
deposit and disbursement of monies coming into their control and custody which are designed to
maximize interest- bearing investment of cash, and to minimize idle and nonproductive cash
balances. The State Controller, with the advice and assistance of the State Treasurer, the State
Budget Officer, and the State Auditor, develops, implements, and amends the Statewide Cash
Management Policy. All cash deposited with the State Treasurer by State entities is managed in
pooled investment accounts to maximize interest earnings. During fiscal year 2004,
Pension
Benefits
Debt
Administration
Cash
Management
16 State of North Carolina
uncommitted State funds were invested in short- term and medium- term U. S. Government notes
and bonds, as well as other deposits, which had a composite average yield of 3.22%.
The State maintains self- insurance programs for employee health; general liability; medical
malpractice; workers’ compensation; and automobile, fire and other property losses. The State
limits its risk for general liability; medical malpractice; and automobile fire and other property
losses by purchasing private insurance for losses in excess of deductibles. See Note 14 of the
Notes to the Financial Statements for a full description of the State's risk management program.
Other Information
In compliance with State statute, an annual financial audit of the State reporting entity is
completed each year by the North Carolina Office of the State Auditor. The Auditor's
examination was conducted in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States, and his
opinion has been included in this report. In addition, the State coordinates the Single Audit
effort of all federal funds through the State Auditor.
The Government Finance Officers Association of the United States and Canada ( GFOA)
awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of
North Carolina for its comprehensive annual financial report ( CAFR) for the fiscal year ended
June 30, 2003. The Certificate of Achievement is a prestigious national award recognizing
conformance with the highest standards for preparation of state and local government financial
reports.
In order to be awarded a Certificate of Achievement, a government unit must publish an
easily readable and efficiently organized comprehensive annual financial report, whose contents
conform to program standards. The CAFR must satisfy both generally accepted accounting
principles and applicable legal requirements.
A Certificate of Achievement is valid for a period of one year only. We believe our
current report continues to conform to the Certificate of Achievement program requirements,
and we are submitting it to GFOA.
In conclusion, we believe this report provides useful data to all parties using it in
evaluating the financial activity of the State of North Carolina. We in the Office of the State
Controller express our appreciation to the financial officers throughout State government and to
the Office of the State Auditor for their dedicated efforts in assisting us in the preparation of this
report. Any questions concerning the information contained in this Comprehensive Annual
Financial Report should be directed to the Office of the State Controller at ( 919) 981- 5454.
Respectfully submitted,
Robert L. Powell
State Controller
December 8, 2004
Risk
Management
Independent
Audit
Certificate of
Achievement
Acknowledgments
State of North Carolina 17
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CERTIFICATE OF ACHIEVEMENT
20 State of North Carolina
ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT
INCLUDING PRINCIPAL STATE OFFICIALS
EXECUTIVE BRANCH
Council of State
Governor
Michael F. Easley
Lieutenant Governor
Beverly E. Perdue
Secretary of State
Elaine F. Marshall
State Auditor
Ralph Campbell, Jr.
State Treasurer
Richard H. Moore
Superintendent of
Public Instruction
Dr. Michael E. Ward
Attorney General
Roy A. Cooper, III
Commissioner of
Agriculture
Britt Cobb, Jr.
Commissioner of
Labor
Cherie K. Berry
Commissioner of
Insurance
James E. Long
Cabinet Secretaries — Appointed by the Governor
Administration
Gywnn T. Swinson
Correction
Theodis Beck
Crime Control and
Public Safety
Bryan E. Beatty
Cultural Resources
Lisbeth C. Evans
Commerce
James T. Fain
Environment
& Natural Resources
William G. Ross, Jr.
Health and Human
Services
Carmen Hooker Odom
Revenue
E. Norris Tolson
Transportation
W. Lyndo Tippett
Appointed by Governor, confirmed by Legislature
Office of the
State Controller
Robert L. Powell
State Controller
State Board
of Education
Howard N. Lee
Chairman
H. Martin Lancaster
President
Molly C. Broad
President
Appointed by University
Board of Governors
Appointed by State Board
of Community Colleges
Juvenile Justice and
Delinquency Prevention
George L. Sweat
State of North Carolina 21
LEGISLATIVE BRANCH JUDICIAL BRANCH
Component Units
State of North Carolina Web Page
http:// www. ncgov. com
North Carolina
Supreme Court
Chief Justice
I. Beverly Lake, Jr.
Associate Justices
Edward Thomas Brady
Robert H. Edmunds, Jr.
Paul Newby
Mark D. Martin
Sarah Parker
George L. Wainwright, Jr.
Administrative
Office of the Courts
Judge Ralph A. Walker
Director
University of North
Carolina System
Community Colleges State Education
Assistance Authority
General Assembly
Senate
House of
Representatives
Co- Speakers
James B. Black
Richard T. Morgan
Democratic Leader
Joe Hackney
Republican Leader
Joe Kiser
President
Lieutenant Governor
President Pro Tempore
Marc Basnight
Deputy Pres. Pro Tempore
Charlie Smith Dannelly
Majority Leader
Tony Rand
Minority Leader
James Forrester
The Golden LEAF, Inc. NC Housing Finance
Agency
Other Component
Units
22 State of North Carolina
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FINANCIAL
SECTION
24 State of North Carolina
State of North Carolina 25
26 State of North Carolina
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MANAGEMENT’S
DISCUSSION AND
ANALYSIS
28 State of North Carolina
Financial
Highlights
MANAGEMENT'S DISCUSSION AND ANALYSIS ( MD& A)
The following is a discussion and analysis of the State of North Carolina’s ( the State’s) financial
performance, providing an overview of the activities for the fiscal year ended June 30, 2004. Please
read it in conjunction with the transmittal letter at the front of this report and with the State's financial
statements, which follow this section.
Government- wide Financial Statements:
⎯ The State’s total net assets increased slightly as a result of this year’s operations. While net assets
of governmental activities increased by $ 613.2 million, or nearly 2.7 percent, net assets of
business- type activities decreased by $ 204.5 million, or about 21.3 percent ( decline related to the
Unemployment Compensation Fund). At year- end, net assets of governmental activities and
business- type activities totaled $ 22.98 billion and $ 754.1 million, respectively.
⎯ Component units reported net assets of $ 10.66 billion, an increase of $ 1.08 billion or 11.3 percent
from the previous year. The majority of the increase ($ 762 million) is due to the net increase in
capital assets for the University of North Carolina System and community colleges ( component
units). The capital asset additions were financed in part by State debt proceeds.
⎯ GASB Statement No. 39 became effective during the fiscal year ( see Notes 20 and 21 to the
financial statements). The beginning net assets of the University of North Carolina System and
community colleges were increased by $ 713 million to include nongovernmental component unit
foundations.
Fund Financial Statements:
⎯ As of the close of the fiscal year, the General Fund reported a total fund balance of negative $ 196.3
million, with reserves of $ 197.4 million, and an unreserved fund balance of negative $ 393.7
million. The total fund balance of the General Fund decreased from the prior year balance of
negative $ 167.1 million.
⎯ The Highway Fund and the Highway Trust Fund reported total fund balances of $ 227.8 million and
$ 266.1 million, respectively.
⎯ The State’s two major enterprise funds, the Unemployment Compensation Fund and the EPA
Revolving Loan Fund, reported net assets of $ 20.1 million and $ 640.5 million, respectively. The
net assets of the Unemployment Compensation Fund decreased by 93 percent from the prior fiscal
year- end.
Capital Assets:
⎯ The State’s investment in capital assets ( net of accumulated depreciation) was $ 25.61 billion,
which represents an increase of 7.7 percent from the previous fiscal year.
⎯ The largest component of capital assets, the State highway system, includes roadway surfaces,
bridges, signage, railings, markings, traffic signals, and other structures related to the State’s motor
vehicle transportation system. The system includes 78,615 miles of roadway, constituting the
second largest highway system in the nation. The system also includes 17,250 bridges spanning
380 miles. At year- end, the State reflected $ 13.28 billion ( net of accumulated depreciation) of
highway system infrastructure.
⎯ Major capital asset activity included additions to the State highway system ($ 1.2 billion), right- of-way
acquisitions ($ 510 million) and the acquisition/ construction of correctional facilities ($ 239
million).
Long- term Debt:
⎯ The State had long- term debt outstanding of $ 5.54 billion, an increase of 34.9 percent from the
previous fiscal year- end. The long- term debt balance includes $ 519.6 million of special obligation
( non- voted) debt issued for governmental activities.
⎯ The State maintained its AAA bond rating with Standard and Poor’s and Fitch. In August 2002,
Moody’s downgraded the State’s credit rating for general obligation debt from “ AAA” to “ Aa1”,
representing the first time since 1960 that North Carolina had less than a “ AAA” rating. In
September 2004, Moody’s revised the State’s outlook to positive from stable.
State of North Carolina 29
OVERVIEW OF THE FINANCIAL STATEMENTS
This discussion and analysis is an introduction to the State’s basic financial statements, which
comprise three components: 1) government- wide financial statements, 2) fund financial statements, and
3) notes to the financial statements. This report also contains additional required supplementary
information ( General Fund budgetary schedule, pension funding progress and contributions) and other
supplementary information ( combining financial statements) in addition to the basic financial
statements. These components are described below.
Government- wide Financial Statements
The Statement of Net Assets and the Statement of Activities are two financial statements that report
information about the State, as a whole, and about its activities that should help answer this question: Is
the State, as a whole, better off or worse off as a result of this year’s activities? These statements
include all non- fiduciary assets and liabilities using the accrual basis of accounting. The current year’s
revenues and expenses are taken into account regardless of when cash is received or paid. The
Statement of Net Assets ( page 52) presents all of the State’s assets and liabilities, with the difference
between the two reported as “ net assets”. Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or deteriorating.
The Statement of Activities ( pages 54 and 55) presents information showing how the State’s net
assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the
underlying events giving rise to the change occur, regardless of the timing of related cash flows.
Therefore, revenues and expenses are reported in these statements for some items that will only result in
cash flows in future fiscal periods ( e. g. uncollected taxes and earned but unused vacation leave).
Both statements report three activities:
Governmental Activities – Most of the State’s basic services are reported under this category. Taxes and
intergovernmental revenues generally fund these services.
Business- type Activities – The State charges fees to customers to help it cover all or most of the cost of
certain services it provides. The State’s Unemployment Compensation Fund and the EPA Revolving
Loan Fund are the predominant business- type activities.
Discretely Presented Component Units – Component units are legally separate organizations for which
the elected officials of the primary government are financially accountable. A description of the
component units and an address for obtaining their separately issued financial statements can be found
beginning on page 70. All component units are combined and displayed in a separate discrete column
in the government- wide financial statements to emphasize their legal separateness from the State. In
addition, financial statements for major component units are presented in the notes to the financial
statements ( pages 137 and 138).
Fund Financial Statements
The fund financial statements begin on page 58 and provide detailed information about the major
individual funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts that the
State uses to keep track of specific sources of funding and spending for a particular purpose. In addition
to the major funds, page 160 begins the individual fund data for the non- major funds. The State's funds
are divided into three categories, governmental, proprietary, and fiduciary, and they use different
accounting approaches.
Governmental funds -- Most of the State's basic services are reported in the governmental funds,
which focus on how money flows into and out of those funds and the balances left at year- end that
are available for future spending. The governmental fund financial statements provide a detailed
short- term view of the State's general government operations and the basic services it provides.
Governmental fund information helps determine whether there are more or fewer financial
resources that can be spent in the near future to finance the State's programs. These funds are
reported using modified accrual accounting, which measures cash and all other financial assets that
30 State of North Carolina
can readily be converted to cash. Governmental funds include the general, special revenue, capital
project, and permanent funds. Because the focus of governmental funds is narrower than that of
the government- wide financial statements, it is useful to compare the information presented for
governmental funds with similar information presented for governmental activities in the
government- wide financial statements. By doing so, readers may better understand the long- term
impact of the government’s near- term financing decisions. Both the governmental fund balance
sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances
provide a reconciliation to facilitate this comparison between governmental funds and
governmental activities.
Proprietary funds -- When the State charges customers for the services it provides, whether to
outside customers or to other agencies within the State, these services are generally reported in
proprietary funds. Proprietary funds ( enterprise and internal service) utilize accrual accounting; the
same method used by private sector businesses. Enterprise funds are used to report activities for
which fees are charged to external users for goods and services. The Unemployment Compensation
Fund and the EPA Revolving Loan Fund are our most significant enterprise funds. Internal service
funds are used to report activities that provide goods and services to the State’s other programs and
activities on a cost- reimbursement basis. - such as the State's State Property Fire Insurance Fund,
the Motor Fleet Management Fund, Computing Services Fund, and Telecommunications Services
Fund. Internal service funds are reported as governmental activities on the government- wide
statements.
Fiduciary funds -- The State acts as a trustee or fiduciary, for its employee pension plans. It is also
responsible for other assets that, because of a trust arrangement, can be used only for the trust
beneficiaries. The State's fiduciary activities are reported in separate Statements of Fiduciary Net
Assets and Changes in Fiduciary Net Assets. These funds, which include pension and other
employee benefits, private- purpose, investment trust, and agency funds, are reported using accrual
accounting. The government- wide financial statements exclude fiduciary fund activities and
balances because these assets are restricted in purpose and cannot be used to support the State’s
own programs.
Notes to the Financial Statements
The notes provide additional information that is essential to a full understanding of the data provided
in the government- wide and fund financial statements. The notes to the financial statements can be
found beginning on page 68 of this report.
Additional Required Supplementary Information
Following the basic financial statements and note disclosures is additional Required Supplementary
Information that further explains and supports the information in the financial statements. The Required
Supplementary Information includes General Fund budgetary comparison schedules reconciling the
statutory and generally accepted accounting principles ( GAAP) fund balances at fiscal year- end, and
pension plan trend information related to funding progress and contributions.
Supplementary Information
Supplementary information includes the introductory section, and the combining financial
statements for non- major governmental, proprietary, and fiduciary funds and for non- major discretely
presented component units. These funds are added together, by fund type, and presented in single
columns in the basic financial statements, but are not reported individually, as with major funds, on the
governmental fund financial statements.
State of North Carolina 31
FINANCIAL ANALYSIS OF THE STATE AS A WHOLE
The State’s combined net assets increased $ 408.7 million or 1.8 percent over the course of this fiscal
year’s operations. The net assets of the governmental activities increased $ 613.2 million or 2.7 percent
and business- type activities had a decrease of $ 204.5 million or 21.3 percent. The following table was
derived from the government- wide Statement of Net Assets:
Net Assets
June 30, 2004 and 2003
( dollars in thousands)
2004 2003 2004 2003 2004 2003
Current and other non-current
assets.......................................... $ 1 0,668,632 $ 9 ,882,858 $ 1,217,551 $ 1,161,973 $ 1 1,886,183 $ 1 1,044,831
Capital assets, net....................................... 25,556,896 23,719,972 49,507 46,272 25,606,403 23,766,244
Total assets................................................ 36,225,528 33,602,830 1,267,058 1,208,245 37,492,586 34,811,075
Long- term liabilities...................................... 5,970,092 4,376,222 10,242 10,270 5,980,334 4,386,492
Other liabilities............................................. 7,274,030 6,858,429 502,697 239,375 7,776,727 7,097,804
Total liabilities........................................... 13,244,122 11,234,651 512,939 249,645 13,757,061 11,484,296
Net assets:
Invested in capital assets,
net of related debt.................................... 24,706,355 23,449,373 40,277 38,450 24,746,632 23,487,823
Restricted.................................................... 1,454,729 1,068,233 665,547 863,426 2,120,276 1,931,659
Unrestricted................................................. ( 3,179,678) ( 2,149,427) 48,295 56,724 ( 3,131,383) ( 2,092,703)
Total net assets......................................... $ 2 2,981,406 $ 2 2,368,179 $ 754,119 $ 958,600 $ 2 3,735,525 $ 2 3,326,779
Governmental Business- type Total Primary
Activities Activities Government
The largest component of the State’s net assets ($ 24.75 billion) reflects its investment in capital
assets ( land, buildings, machinery and equipment, State highway system, and other capital assets), less
related debt still outstanding that was used to acquire or construct those assets. Restricted net assets are
the next largest component ($ 2.12 billion). Net assets are restricted when constraints placed on their
use are either externally imposed or are imposed by law through constitutional provisions or enabling
legislation. The remaining portion, unrestricted net assets, consists of net assets that do not meet the
definition of “ restricted “ or “ invested in capital assets, net of related debt.”
The government- wide statement of net assets for governmental activities reflects a negative $ 3.18
billion unrestricted net asset balance. The State of North Carolina, like many other state and local
governments, issues general obligation debt and distributes the proceeds to local governments and
component units. The proceeds are used to construct new buildings and renovate and modernize
existing buildings on the State’s community college and university campuses, assist county
governments in meeting their public school building capital needs, and to provide grants and loans to
local governments for clean water and natural gas projects. Of the $ 5.54 billion of total long- term debt
outstanding at June 30, 2004, $ 4.57 billion is attributable to debt issued as State aid to component units
( universities and community colleges) and local governments. The balance sheets of component unit
and local government recipients reflect ownership of the related constructed capital assets without the
burden of recording the debt obligation. The policy of selling general obligation bonds and funneling
the cash proceeds to non- primary government ( non- State) entities has been in place for decades.
However, by issuing such debt, the State is left to reflect significant liabilities on its statement of net
assets ( reflected in the unrestricted net asset component) without the benefit of recording the capital
assets constructed or acquired with the proceeds from the debt issuances. Additionally, as of June 30,
2004, the State’s governmental activities have significant unfunded liabilities for compensated absences
in the amount of $ 327 million and a $ 7.5 million cost settlement payable to the federal government ( see
Note 7 to the financial statements). These unfunded liabilities also contribute to the negative
unrestricted net asset balance for governmental activities.
32 State of North Carolina
Governmental
Activities
The following financial information was derived from the government- wide Statement of Activities
and reflects how the State’s net assets changed during the fiscal year:
Changes in Net Assets
For the Fiscal Years Ended June 30, 2004 and 2003
( dollars in thousands)
Governmental Business- type Total Primary
Activities Activities Government
2004 2003 2004 2003 2004 2003
Revenues:
Program revenues:
Charges for services............................................. $ 1 ,505,090 $ 1 ,339,016 $ 926,891 $ 688,786 $ 2 ,431,981 $ 2 ,027,802
Operating grants and contributions........................ 10,108,124 9,042,843 305,053 504,550 10,413,177 9,547,393
Capital grants and contributions............................ 884,345 527,498 892 1,241 885,237 528,739
General revenues:
Taxes
Individual income tax......................................... 7,407,455 7,122,099 — — 7,407,455 7,122,099
Corporate income tax........................................ 760,180 921,611 — — 760,180 921,611
Sales and use tax.............................................. 4,293,040 4,029,403 — — 4,293,040 4,029,403
Gasoline tax...................................................... 1,276,627 1,154,986 — — 1,276,627 1,154,986
Franchise tax..................................................... 560,708 584,584 — — 560,708 584,584
Highway use tax................................................ 578,346 552,759 — — 578,346 552,759
Insurance tax..................................................... 432,975 417,126 — — 432,975 417,126
Beverage tax..................................................... 213,271 198,848 — — 213,271 198,848
Inheritance tax................................................... 128,352 112,150 — — 128,352 112,150
Other taxes........................................................ 313,985 289,261 — — 313,985 289,261
Tobacco settlement............................................... 147,224 173,256 — — 147,224 173,256
Federal grants not restricted to
specific programs.............................................. 136,859 136,859 — — 136,859 136,859
Unrestricted investment earnings.......................... 77,225 103,987 — — 77,225 103,987
Miscellaneous....................................................... 62,601 41,137 3 — 62,604 41,137
Total revenues..................................................... 28,886,407 26,747,423 1,232,839 1,194,577 30,119,246 27,942,000
Expenses:
General government.............................................. 807,248 773,807 — — 807,248 773,807
Primary and secondary education......................... 7,223,766 6,865,921 — — 7,223,766 6,865,921
Higher education................................................... 3,140,794 2,814,375 3,140,794 2,814,375
Health and human services................................... 11,729,904 10,611,537 — — 11,729,904 10,611,537
Economic development......................................... 536,055 489,111 — — 536,055 489,111
Environment and natural resources....................... 599,575 538,032 — — 599,575 538,032
Public safety, corrections and regulation............... 2,093,404 2,029,233 — — 2,093,404 2,029,233
Transportation....................................................... 1,870,578 1,640,007 — — 1,870,578 1,640,007
Agriculture............................................................. 82,394 73,974 — — 82,394 73,974
Interest on long- term debt..................................... 191,228 151,258 — — 191,228 151,258
Unemployment compensation............................... — — 1,389,266 1,603,796 1,389,266 1,603,796
EPA Revolving Loan............................................. — — 5,342 4,266 5,342 4,266
Other business- type activities................................ — — 43,014 30,750 43,014 30,750
Total expenses.................................................... 28,274,946 25,987,255 1,437,622 1,638,812 29,712,568 27,626,067
Increase ( decrease) in net assets before
contributions and transfers................................ 611,461 760,168 ( 204,783) ( 444,235) 406,678 315,933
Contributions to permanent funds......................... 2,068 1,806 — — 2,068 1,806
Transfers............................................................... ( 302) 4,918 302 ( 4,918) — —
Increase ( decrease) in net assets....................... 613,227 766,892 ( 204,481) ( 449,153) 408,746 317,739
Net assets - beginning - restated........................... 22,368,179 21,601,287 958,600 1,407,753 23,326,779 23,009,040
Net assets - ending............................................... $ 2 2,981,406 $ 2 2,368,179 $ 754,119 $ 958,600 $ 2 3,735,525 $ 2 3,326,779
As a result of this year’s operations, the net assets of governmental activities increased by $ 613.2
million or 2.7 percent. The net asset increase is primarily related to the overall growth in tax revenues
( e. g., individual income, sales and use, and gasoline taxes) and spending reversions realized during the
current fiscal year. The major exception to the growth in taxes was corporate taxes, which declined
17.5 percent from the previous fiscal year- end. Key factors in the decline in corporate taxes were
reduced collections, an overall increase in the estimated refund rate, and the legislative suspension in
the prior year of required distributions to special revenue funds. Although corporate profits were up,
corporate tax collections were down because of tax code changes that allowed businesses to write- off
expenses more quickly and the utilization of tax breaks and other incentives designed to attract new
jobs to the State. Also, in the prior year, a portion of corporate income taxes, required to be distributed
to special revenue funds, were retained by the General Fund to manage a budget shortfall.
State of North Carolina 33
Total expenses of governmental activities grew by 8.8 percent during the current period ( compared
to total revenues growth of 8.0 percent). The majority of the spending growth was the result of funding
increases in the State’s two largest functional areas, education and health and human services. The
increase in education spending is related to enrollment increases at the State’s universities and
community colleges and funding increases for the State’s public schools. The growth in health and
human services is the result of increased spending for Medicaid, which is the State’s largest public
assistance program. The growth in Medicaid is explained by an increase in individuals eligible for
Medicaid services, a large increase in payments for dental services due to a lawsuit settlement that
raised dental rates, and a significant increase in prescription drug payments and Disproportionate Share
Hospital payments. There were also significant increases in the Electronic Benefits program due to
higher client participation as a result of the recent economic downturn.
The following chart depicts revenue sources of governmental activities as percentages of total
revenues for the fiscal year:
Revenues - Governmental Activities
Fiscal Year Ended June 30, 2004
Charges for services
5%
Capital grants and
contributions
3%
Individual income and
corporate income taxes
28%
Gasoline and highway
use taxes
6%
Other taxes
6%
Miscellaneous
1%
Sales and use tax
15%
Operating grants and
contributions
36%
The following chart depicts the total expenses and total program revenues of the State’s
governmental functions. This format identifies the extent to which each governmental function is self-financing
through fees and intergovernmental aid or draws from the general revenues of the State.
34 State of North Carolina
Business- type
Activities
Expenses - Governmental Activities
Fiscal Year Ended June 30, 2004
—
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
$ 6,000
$ 7,000
$ 8,000
$ 9,000
$ 10,000
$ 11,000
$ 12,000
$ 13,000
General
government
Primary and
secondary
education
Higher
education
Health and
human services
Economic
development
Environment
and natural
resources
Public safety,
corrections, and
regulation
Transportation Agriculture Interest on long-term
debt
Expenses
Program Revenues ( excluding Capital
Grants)
Millions
The following chart reflects the dollar change in the functional expenses of governmental activities
between fiscal years 2003 and 2004:
Dollar Change in Governmental Activities Functional Expenses
Between Fiscal Years 2003 and 2004
$ 40
$ 8
$ 231
$ 64
$ 62
$ 47
$ 1,118
$ 326
$ 358
$ 33
$— $ 200 $ 400 $ 600 $ 800 $ 1,000 $ 1,200
Interest on long- term debt
Agriculture
Transportation
Public safety, corrections and regulation
Environment and natural resources
Economic development
Health and human services
Higher education
Primary and secondary education
General government
( dollars in millions)
Business- type activities reflect a decrease in net assets of $ 204.5 million or 21.3 percent. The key
reason for the decline was the Unemployment Compensation Fund’s significant operating loss, which
was financed by the proceeds of short- debt. At year- end, the net assets of the Unemployment
Compensation Fund were $ 20.1 million, a decrease of $ 257.4 million or 92.7 percent from the prior
fiscal year- end. The Unemployment Compensation Fund and the EPA Revolving Loan Fund are the
predominant activities, comprising 87.6 percent of the total net assets of business- type activities. A
more detailed discussion of the State’s enterprise funds is provided in the following section.
State of North Carolina 35
Governmental
Funds
FINANCIAL ANALYSIS OF THE STATE’S FUNDS
The State uses fund accounting to ensure and demonstrate compliance with finance- related legal
requirements
The focus of the State’s governmental funds is to provide information on near- term inflows,
outflows, and balances of spendable resources. As of the end of the fiscal year, the State’s
governmental funds reported combined ending fund balances of $ 3.0 billion, a 14.7 percent increase
from the prior fiscal year- end ( as restated). The majority of the increase was related to debt proceeds
recognized in other governmental funds for the N. C. Infrastructure Finance Corporation ( Corporation),
a blended component unit of the State. The Corporation issued debt for the repair and renovation of
State facilities and for the acquisition and construction of correctional facilities. The major
governmental funds are discussed individually below.
General Fund
The General Fund is the chief operating fund of the State. The fund balance of the General Fund
decreased from a negative $ 167.139 million at June 30, 2003 ( as restated) to a negative $ 196.287
million at June 30, 2004. A key factor in the decline was the Department of Revenue’s revision of the
refund rate for corporate taxes, which resulted in a $ 45.8 million reduction in corporate tax revenues for
the 2004 fiscal year ( Note: GAAP requires tax revenues to be reported net of estimated refunds). In
addition, the total fund deficit continues to be influenced by the excess of accrued expenditures over
accrued revenues for the State’s Medicaid program. A more detailed analysis of the General Fund is
provided in the budgetary highlights section ( see next section).
2003- 2004 General Fund Budgetary Highlights
The General Fund budget for fiscal year 2003- 04 was signed into law on June 30, 2003. The enacted
budget was founded upon an overall nominal ( real growth plus inflation) economic growth rate of 3.5
percent for 2003- 04. The appropriated budget included provisions that were designed to increase
General Fund revenues. The most significant revenue adjustment was the continuation of two
temporary tax increases that were scheduled to expire in 2003. In 2001, the General Assembly
temporarily raised the State sales tax rate by a half- cent to 4.5 percent and the highest individual income
tax rate from 7.75 percent to 8.25 percent. The budget continues the State sales tax rate at 4.5 percent
and the 8.25 percent income tax bracket. In addition, several streamlining and conformity provisions,
as well as departmental fees, were authorized that increase General Fund availability. Finally the
Department of Revenue was given broader authority and resources to collect unpaid tax liabilities. The
following table summarizes the 2004 revenue enhancements ( amounts expressed in millions).
Revenue Enhancements – 2004 Fiscal Year
Maintain State sales tax at 4.5%................................................... $ 341.8
Maintain top income tax bracket.................................................... 37.5
Streamline tax revisions................................................................ 78.5
Department of Revenue - Project Tax Collect................................ 90.2
Tobacco settlement funds ............................................................ 66.8
Fee increases and trust fund transfers.......................................... 87.0
Tax reductions for federal conformity............................................. ( 70.0)
Federal fiscal relief........................................................................ 136.9
Federal disaster relief funds.......................................................... 108.8
Total 2004 enhancements.................................................... $ 877.5
The majority of funding increases for 2004 were in the education and human service areas. The
budget provided full funding for enrollment increases in the University of North Carolina System
($ 46.6 million), the community college system ($ 32 million), and private colleges and universities ($ 2.8
36 State of North Carolina
million). In addition, the budget includes funds to hire additional public school teachers to reduce class
size in the second grade ($ 25.3 million) and to expand the Governor’s More- at- Four Program ($ 8.4
million), which helps prepare at risk four- year- old children for success in school. It also provides funds
for the annual step increase for public school teachers ($ 48.1 million) and for ABC bonuses earned in
the 2002- 03 school year ($ 96 million).
The budget provides additional funding for the Health Insurance Program for Children ($ 12.2
million), which allows all eligible children to receive health care insurance ( see Note 14C to the
financial statements). In addition, expansion funds are provided for the Mental Health Trust Fund
($ 12.5 million) to facilitate the progress toward mental health reform.
The budget provided over $ 200 million in 2003- 04 to support employee benefit programs.
Specifically, it authorized a $ 550 one- time compensation bonus for State employees not included on the
teacher salary schedule. In addition, the State Health Plan received sufficient funds to cover increased
employee- related health care costs without reduction in benefits. The budget also began repayment of
the funds withheld from the Retirement System in 2000- 01 due to the budget shortfall ( Note: the total
obligation to the Retirement System was $ 129.9 million plus accrued interest). Legislation was enacted
in 2001 to formalize the General Assembly’s intent to repay the debt, subject to the availability of
funds, over a five- year period beginning July 1, 2003. The budget authorized the payment of $ 10
million to partially repay the debt to the Retirement System. At year- end, the General Assembly
authorized an additional payment of $ 20 million to the Retirement System.
General Fund Budget Variances
The original General Fund budget, including State appropriations and appropriations supported by
departmental receipts, serves as a starting point or plan for the Governor to execute the General Fund
budget pursuant to the powers granted by the Executive Budget Act. At the state level in North
Carolina, it is not unusual for the budget to change during the fiscal year in relation to budget
adjustments made to accommodate departmental receipts. The General Fund budget supported by State
appropriation, is a subset of the General Fund financial schedule presented in the CAFR as required
supplementary information. The current CAFR schedule reflects all spending required to support the
State’s General Fund activities and the funding to support those activities, including State tax and non-tax
revenues, federal revenues, student tuition, and other fees, licenses, and fines.
Under current State budget management practice, particularly related to departmental federal
receipts, primary emphasis is placed on comparisons of the final authorized budget and actual spending.
At the State level, budgetary cuts related to State appropriations are implemented by decreasing
allowable actual expenditures, as opposed to decreasing the State appropriation through a formal
legislative process. The Governor and State agencies maintain legal authority to spend the dollars
originally appropriated to them, however, in recent years the actual spending has been limited by the
collection of tax and nontax revenue. In extremely rare cases, the General Assembly has held special
sessions to formally amend the State appropriation budget.
The portion of the original budget comprising departmental receipts is not intended to be the sole
controlling point to manage the State’s General Fund budget. The final budget includes amendments
for departmental receipts collected during the fiscal year as allowed by law. General Fund departmental
receipts are typically authorized for expenditure within the activity that generated the receipt.
Historically, final estimated receipts have varied significantly from the original estimate at the
beginning of the fiscal year. State agencies by law must spend departmental receipts prior to spending
tax and nontax supported appropriations. If departmental receipts are higher than expected,
appropriated dollars may go unspent and be re- appropriated in a subsequent fiscal year.
State of North Carolina 37
Variances – Original and Final Budget
The budget variance between original and final budget for federal funds revenue is attributable to
the awarding of new federal funds during the fiscal year and funds being drawn down to reimburse
unanticipated expenditures.
The budget variance for intra- governmental transactions revenue is attributable primarily to the
following: $ 81.5 million of statewide encumbrance carry forward amounts from fiscal year 2002- 2003,
$ 126.4 million of Medicaid Disproportionate Share, $ 8.3 million of Department of Health and Human
Services ( DHHS)- cost report settlement, $ 272.9 million of DHHS- intra- governmental transfers within a
DHHS general fund budget code, $ 351.2 million of DHHS funds transferred from various budget codes
within DHHS, and $ 14.8 million of Mental Health Trust Fund intra- governmental transfers.
The budget variance for contributions, gifts and grants revenue is attributable primarily to the
decision by the Division of Medical Assistance to change an accounting process to go on cost
allocation, leading to the unexpected budgeting of $ 129.1 million for the State match.
For expenditures, the variances between the original budget and final budget are related to the
corresponding revenue budget variances. As revenue budget accounts are increased, a corresponding
increase occurs in the expenditure budget accounts. In addition to those increases, agency expenditure
budgets were also increased by the allocation of statewide reserves such as the legislative salary
increase, health insurance, and retirement reserves. There was also an additional appropriation of $ 88.1
million authorized for fiscal year 2003- 2004 as a result of special sessions of the General Assembly.
Variances - Final Budget and Actual Results
The budget variance between final budget and actual revenues for corporate income taxes occurred
because the growth in corporate profits exceeded the forecast. Investment Income was below the final
budget because market interest rates were below the forecast.
Departmental federal funds actually received by agencies were $ 741.9 million less than the final
budget. Of this variance, $ 357.2 million was attributable to the Department of Public Instruction.
Actual federal draw downs are reflective of the actual expenditures of these federal funds. In addition,
$ 190.8 million of the Federal funds variance is attributable to the Department of Health and Human
Services not incurring qualifying costs as budgeted.
For expenditures, the variances between final budget and actual expenditures for primary and
secondary education and public safety, corrections, and regulation occurred because actual revenues
were less than the budgeted revenues; therefore, expenditures that depended on the receipt of these
funds could not be made.
The State ended fiscal year 2003- 04 with an over- collection of tax revenues of $ 242.4 million. The
major tax categories that exceeded the budgeted forecast were individual income ( 1.1%), corporate
income ( 9.2%), and sales and use ( 4.1%). In addition, unexpended appropriations or reversions of $ 159
million were realized. The State fiscal year 2003- 04 closed out with a $ 289.4 million unreserved fund
balance after transferring $ 116.7 million to the Rainy Day Fund and $ 76.8 million to the Repair and
Renovation Reserve.
38 State of North Carolina
Highway Fund
The Highway Fund dates back to 1921, which is when the N. C. General Assembly first imposed the
gasoline tax. It accounts for most of the activities of the North Carolina Department of Transportation,
including the maintenance and construction of the State’s primary, secondary, and urban road systems,
the State Highway Patrol, the Division of Motor Vehicles, and transit and rail. The primary revenue
sources of the Highway Fund are federal funds, three- fourths of gasoline taxes, vehicle registration fees,
and driver’s license fees.
The fund balance of the State Highway Fund decreased from $ 299.9 million at June 30, 2003 to
$ 227.8 million at June 30, 2004, a decrease of 24 percent. The decline was the result of total
expenditures exceeding total revenues for the current period. Over the past three years, the North
Carolina Department of Transportation has used excess cash to advance construction projects and to
accelerate contract resurfacing. Unbudgeted emergency relief expenditures for Hurricane Isabel and
several ice storms also impacted cash flow. However, the excess of expenditures over revenues of
$ 185.3 million in 2004 was smaller than the previous fiscal year because total revenues grew at a faster
rate than total expenditures. Total revenues increased by $ 252.2 million or 11.7 percent primarily
because of increases in gasoline taxes and federal funds. A 4 percent increase in taxable gallons sold
combined with a 3 percent boost in the average fuel tax per gallon raised fuel tax revenues by $ 89.2
million. Federal billings rose $ 180.7 million due to increased Federal Highway Administration
construction. Total expenditures increased by $ 207.7 million or 8.7 percent due to increased
maintenance and construction expenditures. In addition, operating transfers to other funds increased by
$ 24.4 million. During the fiscal year, the Highway Fund also received an advance of $ 15.4 million
from a municipality for roadway and pedestrian improvements.
In September 2004, the State Board of Transportation approved a new long- range plan that
prioritizes transportation investment for the next 25 years. The Statewide Transportation Plan provides
a blueprint for greater investment in maintenance, preservation, and modernization of the State’s
existing highway system as well as other transportation options such as rail and public transportation.
The share of transportation dollars spent on new highway projects will drop from 45 percent to 26
percent. The highway needs of the State’s growing population will be accommodated in part by
maintaining and upgrading existing roads and by increasing anti- congestion measures such as
synchronized traffic signals.
The centerpiece of the plan is the Recommended Investment Scenario, which outlines priorities from
the estimated $ 55 billion, in today’s dollars, expected to be available over the next 25 years for
transportation investment. Based on this scenario, the Department of Transportation ( NCDOT) will be
able to meet an additional 10 percent of its maintenance and preservation needs and nearly 25 percent
more modernization infrastructure needs. Additionally, the scenario proposes increasing NCDOT’s
investment in other transportation modes. The plan also identifies $ 84 billion in total transportation
needs and states that NCDOT will only be able to meet two- thirds of the State’s 25- year transportation
needs at its current funding levels, regardless of how NCDOT’s resources are allocated. Full
implementation of the Recommended Investment Scenario will be gradual.
Highway Trust Fund
Legislation creating the Highway Trust Fund was passed by the General Assembly in 1989. It was
established to provide a dedicated funding mechanism to meet highway construction needs in North
Carolina. The Highway Trust Fund also provides extra money for the State’s municipalities to
adequately maintain their streets and pays the debt service on the State’s general obligation bonds
issued for highway purposes. The principal revenue sources of the Highway Trust Fund are highway
use taxes, one- fourth of gasoline taxes, and various title and registration fees. From the proceeds of the
highway use tax, $ 252.4 million was transferred to the general fund for the 2003- 04 fiscal year and
thereafter, the transfer amount is scheduled to be $ 240 million per year subject to adjustment for
inflation. The General Fund intends to repay by June 30, 2009 the $ 125 million ( plus interest) advanced
from the Highway Trust Fund during the 2002- 03 fiscal year ( see Note 9 to the financial statements).
State of North Carolina 39
Enterprise
Funds
The fund balance of the Highway Trust Fund increased from $ 208.2 million at June 30, 2003 to
$ 266.1 million at June 30, 2004, an increase of 27.8 percent. The increase was attributable, in part, to
$ 400 million of highway bonds issued on November 2003. The proceeds of these bonds were used to
reimburse highway expenditures of prior years. These bonds constitute a portion of the $ 950 million
highway bond authorization approved by the voters in November 1996 ( Note: $ 250 million of such
bonds were issued in 1997). At year- end, the remaining highway bond authorization was $ 300 million.
Total revenues increased by $ 54.0 million or 5.7 percent, primarily because of increases in the gasoline
tax and the highway use tax. Gasoline taxes rose $ 29.5 million due primarily to a 4 percent increase in
taxable gallons sold combined with a 3 percent rise in the average fuel tax per gallon. Highway use
taxes on vehicle registrations grew $ 25.6 million or 4.6 percent. Total expenditures increased by
$ 220.9 million or 36.3%. The increase is due to a significant rise in contract lettings for the
Transportation Improvement Program and N. C. Moving Ahead projects to address transportation
infrastructure needs.
The 2003 General Assembly passed the Governor’s “ Moving Ahead” transportation initiative to
allow, over two years, the use of $ 630 million of Highway Trust Fund cash balances for highway
preservation, modernization, and maintenance. Additionally, it allows $ 70 million for public transit,
rail, ferry, bicycle, and pedestrian projects.
The State’s enterprise funds or business- type activities provide the same type of information found
in the government- wide financial statements, but in more detail. The major enterprise funds are
discussed individually below.
Unemployment Compensation Fund
The net assets of the Unemployment Compensation Fund decreased by $ 257.4 million during the
current fiscal year, which is a 92.7 percent decrease from the prior fiscal year- end. The decrease is
explained primarily by the fund’s significant operating loss ( excess of operating expenses over
operating income), which was financed by the proceeds of short- term debt. The operating loss was
$ 509.6 million this year versus $ 956.1 million in 2003. At June 30, 2004, the short- term debt balance
was $ 251.8 million compared to zero for the previous year- end. To ensure timely payment of
unemployment benefits, the State received repayable advances from its Federal Unemployment
Account and issued tax anticipation notes ( see Note 6 to the financial statements). The State estimated
that it will save millions of dollars in interest payments by selling tax anticipation notes instead of
borrowing exclusively from the federal government. Unemployment benefit expenses decreased 13.4
percent in fiscal year 2004 to $ 1.39 billion. These expenses were lower because the State’s
unemployment rate fell during the second half of the fiscal year. North Carolina’s seasonally adjusted
unemployment rate was 5.5 percent in June 2004, making four consecutive months that the rate was
below the national average. While manufacturing jobs declined since January 2004, all other sectors of
the economy gained jobs during the second half of the fiscal year. Job gains were especially large in
professional and business services and in educational and health services.
In fiscal years 2003 and 2002, the State also received funding for extended unemployment benefits.
In March 2002, the U. S. Congress signed into law the Temporary Extended Unemployment
Compensation Act of 2002. This program, which is financed entirely by federal funds, provided
extended benefits to claimants who had exhausted their regular State unemployment benefits. This
program ended during the 2004 fiscal year because of the decrease in the State’s average unemployment
rate.
The 2003 Session of the General Assembly enacted legislation to help preserve the integrity of the
unemployment insurance tax system. Session Law 2003- 67 ( Senate Bill 326) clarifies that an employer
cannot avoid an undesirable unemployment insurance rate by shifting employees to a newly created
company with a more desirable tax rate. This practice is known as State unemployment tax avoidance
or “ SUTA dumping” ( i. e., since the bulk of the old company’s employees are moved to a new company
and the higher tax rate of the older company is “ dumped”).
40 State of North Carolina
Starting January 1, 2005, a 20 percent surcharge will be in effect for unemployment insurance
contributions, as required by State statute. The surcharge will be in effect because of the fund’s low
reserves. The proceeds of the surcharge will be credited to the Employment Security Commission
Reserve Fund and will improve the solvency of the Unemployment Compensation Fund.
EPA Revolving Loan Fund
The net assets of the EPA Revolving Loan Fund increased by $ 58.9 million during the current fiscal
year, which was a 10.1 percent increase from the prior fiscal year- end. Operating income was $ 9.99
million ( excess of operating revenues over operating expenses). Net nonoperating revenues were $ 42.9
million, consisting primarily of federal capitalization grants and investment earnings. In addition, $ 7.4
million of clean water bond proceeds were transferred in from special revenue funds.
State of North Carolina 41
Capital
Assets
Capital Asset and Debt Administration
As of June 30, 2004, the State’s investment in capital assets was $ 25.61 billion, which represents an
increase of 7.7 percent from the previous fiscal year- end ( see table below).
Capital Assets as of June 30
( net of depreciation, dollars in thousands)
2004 2003 2004 2003 2004 2003
Land................................................... $ 8 ,300,655 $ 7 ,713,505 $ 2,563 $ 2,563 $ 8 ,303,218 $ 7 ,716,068
Buildings............................................ 1 ,578,963 1 ,369,455 13,231 13,975 1 ,592,194 1 ,383,430
Machinery and equipment.................. 5 62,864 5 51,155 1,314 1,047 5 64,178 5 52,202
Infrastructure:
State highway system..................... 1 3,284,267 1 2,444,212 — — 1 3,284,267 1 2,444,212
Other infrastructure......................... 7 6,859 8 0,489 7,866 8,669 8 4,725 8 9,158
Intangible assets................................ 1 06,506 1 08,927 — — 1 06,506 1 08,927
Art, literature, and other artifacts........ 1 ,126 7 — — 1 ,126 7
Construction in progress.................... 1 ,645,656 1 ,452,222 24,533 20,018 1 ,670,189 1 ,472,240
Total........................................... $ 2 5,556,896 $ 2 3,719,972 $ 49,507 $ 46,272 $ 2 5,606,403 $ 2 3,766,244
Total percent change between
fiscal years 2003 and 2004 7.7 % 7.0 % 7.7 %
Governmental
Activities
Business- type
Activities Total
Major capital asset activity includes additions to the State highway
system ($ 1.2 billion), right- of- way acquisitions ($ 510 million), and the
acquisition/ construction of correctional facilities ($ 239 million).
The largest component of capital assets is the State highway system and related right- of- ways. The
State has approximately a 78,615- mile highway system, making it the second largest State- maintained
highway system in the nation. The system continues to increase as roads are widened and new roads
and bridges are constructed.
The 2002- 2003 Session of the General Assembly authorized the issuance of up to $ 300 million of
special indebtedness to finance the repair and renovation of State facilities and related infrastructure
that are supported by the State’s General Fund. Of the $ 300 million, approximately $ 157 million will
be allocated to the University of North Carolina System ( component unit). Each of the sixteen
constituent institutions of the UNC System will receive a portion of the proceeds for repairs and
renovations. The remaining $ 143 million of the proceeds will be used to make repairs and renovations
to various State facilities located throughout North Carolina. The State issued $ 125 million in
certificates of participation during the 2004 fiscal year to finance repair and renovation projects. At
year- end, the remaining authorization was $ 175 million. In addition, the most recent session of the
General Assembly ( 2003- 2004) directed the transfer on June 30, 2004, of $ 76.8 million from the
unrestricted credit balance of the General Fund in fiscal year 2004 to the Repairs and Renovations
Reserve Account, to be applied to the repair and renovation of State and university facilities.
In July 2003, the N. C Infrastructure Finance Corporation ( Corporation), a blended component unit
of the State, acquired three close security correctional facilities by issuing $ 218.4 million in lease-purchase
revenue bonds. Also, during the fiscal year, the Corporation issued $ 158.96 million in
certificates of participation to construct and equip two close security correctional facilities and to begin
designing a third facility. The Department of Correction is undertaking construction initiatives to
address a cell shortfall and to allow for the implementation of sentencing reform. The State’s
correctional facility population has more than doubled since 1980. The rapid growth in inmates is
attributable to increases in the State’s population, increases in length of stay in correctional facilities,
and changes in criminal laws.
42 State of North Carolina
As further detailed in Note 19( F) to the financial statements, the State has commitments of $ 1.9
billion for the construction of highway infrastructure, which are expected to be financed by gasoline tax
collections and federal funds. Other commitments for the construction and improvement of State
government facilities totaled $ 522.9 million, which are expected to be financed primarily by debt
proceeds ( certificates of participation), State appropriations, and federal funds.
More detailed information about the State’s capital assets is presented in Note 5 to the financial
statements.
State of North Carolina 43
Long- term
Debt
At year- end, the State had total long- term debt outstanding of $ 5.54 billion, an increase of 34.9
percent from the previous fiscal year- end ( see table below).
Outstanding Debt as of June 30
( dollars in thousands)
2004 2003 2004 2003 2004 2003
General obligation bonds...................... $ 4,982,860 $ 4,066,990 $ — $ — $ 4,982,860 $ 4,066,990
Revenue bonds.................................... 218,405 — 9 ,325 9 ,570 227,730 9,570
Certificates of participation................... 301,165 17,500 — — 301,165 17,500
Notes payable...................................... 25,008 9,629 — — 25,008 9,629
Total.............................................. $ 5,527,438 $ 4,094,119 $ 9 ,325 $ 9 ,570 $ 5,536,763 $ 4,103,689
Total percent change between
fiscal years 2003 and 2004 35.0 % ( 2.6)% 34.9 %
Governmental
Activities
Business- type
Activities Total
The State’s general obligation bonds are secured by a pledge of the faith, credit, and taxing power of
the State. The revenue bonds issued by the State are secured solely by specified revenue sources. The
certificates of participation ( COPs) and lease- purchase revenue bonds issued by the N. C. Infrastructure
Finance Corporation, a blended component unit of the State, are secured by lease and installment
payments made by the State, and in the event of default, by a security interest in the leased facilities
pursuant to a leasehold deed of trust ( as applicable). The COPs issued for repair and renovation
projects ( see below) are not secured by a lien upon or security interest in the projects or any other
property of the State. All payments of the State for the COPs and the lease- purchase revenue bonds are
subject to appropriation by the General Assembly.
During the 2004 fiscal year, the State issued $ 1.159 billion in general obligations bonds ( excluding
refunding issues), $ 218.41 million in lease- purchase revenue bonds, and $ 283.96 million in certificates
of participation ( COPs). The new general obligation debt consisted of $ 708 million in public
improvement bonds ( consolidation of clean water bonds and higher education bonds), $ 400 million in
highway bonds, $ 36 million in natural gas bonds, and $ 15 million in clean water bonds. The proceeds
of the lease- purchase revenue bonds were used to acquire three close security correctional facilities in
Alexander, Anson, and Scotland counties. The proceeds of the COPs will be used to construct and
equip two close security correctional facilities in Greene and Bertie counties and to finance the cost of
design and certain additional costs of a third close security correctional facility in Columbus County.
The State also issued COPs for the repair and renovation of State facilities and related infrastructure
that are supported by the General Fund.
The State refinanced $ 336.9 million of its existing debt in 2004 to improve cash flow and to take
advantage of lower interest rates. By refinancing the debt, the State will reduce its future debt service
payments by approximately $ 13.5 million over the next ten years.
Higher Education Authorization
The 1999- 2000 Session of the General Assembly authorized the issuance of up to $ 3.1 billion of
higher education improvement bonds, which were subsequently approved by the voters of the State.
The $ 3.1 billion bond authorization represents the largest debt authorization in the State’s history. The
proceeds of these general obligation bonds will be used solely to construct new buildings and to
renovate and modernize existing buildings on the State's 58 community college and 16 University of
North Carolina campuses. These improvements are needed to meet enrollment demand and to ensure
that the State’s college and university buildings meet modern code requirements and are equipped to
prepare graduates for twenty- first century jobs. The bond legislation passed by the General Assembly
specifies the amount of bond funding that will flow to each community college and university campus.
At year- end, the authorized but unissued higher education bonds were $ 1.37 billion.
44 State of North Carolina
Recent Legislation and Studies
The most recent session of the General Assembly ( 2003- 04 Session) authorized the issuance of up to
$ 468 million of special indebtedness to finance vital State facilities for health care and biotechnology.
No more than $ 310 million of the special indebtedness may be issued during the 2004- 05 fiscal year.
The State is authorized to use special indebtedness to provide:
− $ 338 million for constructing five new projects in the University of North Carolina ( UNC) System.
These projects consist of a cancer center at UNC- Chapel Hill ($ 180 million), a cardiovascular
institute at East Carolina University ($ 60 million), a bioinformatics Center at UNC- Charlotte ($ 35
million), a pharmacy program facility at Elizabeth City State University ($ 28 million), and a health
center at UNC- Asheville ($ 35 million).
− $ 50 million for land acquisition and planning for five other projects in the UNC System;
− $ 35 million for constructing up to five youth development centers;
− $ 45 million for capital projects within the State Parks System, including repairs and renovations of
park facilities and land acquisition. High priority uses of the debt proceeds include acquiring land
near military bases to prevent encroachment.
The fiscal impact of the $ 468 million of special indebtedness on the General Fund is expected to be
zero because of the annual transfer of revenue from other sources to the General Fund in an amount to
cover the estimated debt service. The debt service for the UNC System facilities and the youth
development centers will be reimbursed from the Health and Wellness Trust Fund and the Tobacco
Trust Fund ( special revenue funds). The debt service for the parks projects is fully funded by the
streams of revenue available to the Parks and Recreation Trust Fund, the Natural Heritage Trust Fund,
and the Clean Water Management Trust Fund ( special revenue funds). The maximum annual debt
service is estimated to be $ 47.4 million in fiscal year 2010- 11. The total interest on the $ 468 million of
debt is estimated to be $ 310 million.
Special indebtedness is non- voted debt that is generally secured only by an interest in State property
being acquired or improved ( e. g., certificates of participation and lease- purchase revenue bonds). With
this type of debt, there is no pledge of the State’s faith, credit or taxing power to secure the debt, which
is why voter approval is not required. If the State defaulted on its repayments, no deficiency judgment
could be rendered against the State, but the State property that serves as security could be disposed of to
generate funds to satisfy the debt. Failure to repay the debt would have negative consequences for the
State’s credit rating. Article 9 of Chapter 142 of the General Statutes prohibits the issuance of special
indebtedness except for projects specifically authorized by the General Assembly. The use of
alternative financing methods provides financing flexibility to the State and permits the State to take
advantage of changing financial and economic environments.
During the 2003- 04 Session, the General Assembly created a Debt Affordability Advisory
Committee ( Committee) to annually advise the Governor and the General Assembly on the estimated
debt capacity of the State for the upcoming ten fiscal years. The Committee is responsible for preparing
an annual debt affordability study and establishing guidelines for evaluating the State’s debt burden.
The Committee is required to report its findings and recommendations to the Governor, the General
Assembly, and the Fiscal Research Division of the General Assembly by February 1 of each year.
In April 2004, the State Treasurer presented to the House and Senate Finance Committees of the
General Assembly, the second Debt Affordability Study for North Carolina. It provides a methodology
for measuring, monitoring, and managing the State’s debt capacity. The study evaluated the State’s
current and projected debt burden using indicators such as tax- supported debt to personal income, debt
per capita, debt service to tax revenue, and rapidity of principal repayment ratios. In addition, the report
includes several recommendations based on the results of the study. According to the report, all of the
State’s debt ratios are below median levels for all fifty states, as compiled by Moody’s Investors
Service, and for a peer group of seven states rated triple AAA by all three credit rating agencies. Thus,
the study concludes that the State’s debt is considered low and is manageable at the current level.
However, due to the projected issuance of $ 2.2 billion of tax- supported debt over the next three years
State of North Carolina 45
( 62 percent for higher education purposes), all of the State’s debt ratios are expected to increase over
this period. The State Treasurer noted in the report that credit rating agencies consider a debt
affordability study as a positive factor when evaluating issuers and assigning credit ratings.
Credit Ratings
Credit ratings are the rating agencies’ assessment of a governmental entity’s ability and willingness
to repay debt on a timely basis. Credit ratings are an important factor in the public credit markets and
can influence interest rates a borrower must pay.
The State’s general obligation bonds are rated “ AAA” by Fitch Ratings, “ Aa1” with a positive
outlook by Moody’s Investors Service ( Moody’s) and “ AAA” with a stable outlook by Standard &
Poor’s Ratings Services. All three agencies base their prime ratings on the State’s strong, diverse
economic base, its sound financial management, and low debt levels. In September 2004, Moody’s
revised the State’s outlook to positive from stable and noted the following:
“ This rating reflects the State’s slowly stabilizing economy, its improving tax revenues, its
conservative debt policy, and its effective financial management. While general fund balances
remain negative, flexible cash reserves outside the general fund are ample, and pension funding
is exceptionally strong. Moody’s expects that the state will continue to take actions to restore
structural balance and rebuild reserves.”
In August 2002, Moody’s downgraded the State’s credit rating for general obligation debt from
“ AAA” to “ Aa1”, representing the first time since 1960 that North Carolina had less than a “ AAA”
rating. While Moody’s praised the strength of executive powers available to insure a balanced budget,
it advised that the primary reasons for the downgrade were the State’s continued budget pressure,
reliance on non- recurring revenues, and weakened balance sheet. Also, Moody’s commented that the
task of restoring structural budget balance and rebuilding reserves faces political and economic
obstacles.
The certificates of participation and lease- purchase revenue bonds issued by the North Carolina
Infrastructure Finance Corporation are rated “ AA+” by Standard & Poor’s, “ AA” by Fitch, and “ Aa2”
by Moody’s.
Limitations on Debt
The Constitution of North Carolina ( Article 5, Section 3) imposes limitations upon the increase of
certain State debt. It restricts the General Assembly from contracting debts secured by a pledge of the
faith and credit of the State, unless approved by a majority of the qualified voters of the State, except
for the following purposes:
1. To fund or refund a valid existing debt;
2. To supply an unforeseen deficiency in the revenue;
3. To borrow in anticipation of the collection of taxes due and payable within the current fiscal year to
an amount not exceeding 50 percent of such taxes;
4. To suppress riots or insurrections; or to repel invasions;
5. To meet emergencies immediately threatening the public health or safety, as conclusively
determined in writing by the Governor; and
6. For any other lawful purpose, to the extent of two- thirds of the amount by which the State’s
outstanding indebtedness shall have been reduced during the next preceding biennium.
More detailed information about the State’s long- term liabilities is presented in Note 7 to the
financial statements.
46 State of North Carolina
Budget and
Economic
Update
The General Fund budget for 2004- 05 was signed into law on July 20, 2004. The enacted budget
was founded upon an overall nominal ( real growth plus inflation) economic growth rate of 5.5 percent
for 2004- 05. The budget continues the State sales and use tax rate at 4.5 percent and the 8.25 percent
income tax bracket for fiscal year 2004- 05 ( Note: the half- cent sales tax increase and the high income
tax bracket are scheduled to sunset at the end of the year), diverts a portion of the national tobacco
settlement payments ($ 60 million), and uses monies left over at the end of the 2003- 04 fiscal year
($ 289.4 million). It also earmarked an additional $ 116.7 million for the Rainy Day Fund and $ 76.8
million for the Repair and Renovation Reserve, indicating the State’s intention to continue to replenish
its reserves.
The 2004 hurricane season produced six tropical systems that directly impacted North Carolina.
Federal, State, and local emergency management officials estimate that these storms caused over $ 200
million in damages that are eligible for governmental assistance. Assistance is for a variety of services
including emergency protective measures, repair and replacement of homes, debris removal, stream
clearance, and bridge repair and replacement. In order to match federal funds available to North
Carolina for federal disaster recovery services, the Governor ordered State agencies to revert 0.75
percent of their 2004- 05 budgets to provide an estimated $ 120 million for storm relief. Special
exemptions are allowed for constitutionally mandated programs as well as emergency situations related
to law enforcement, health care, and public safety.
North Carolina’s seasonally adjusted unemployment rate as of September 2004 was 4.8 percent,
more than a half a percentage point lower than the national unemployment rate of 5.4 percent.
September was the seventh consecutive month that the State’s unemployment rate was below the
national average. For comparison, the State and national unemployment rates as of September 2003
were 6.4 percent and 6.1 percent, respectively.
2004- 05 Revenue Update ( Cash Basis)
For the first three months of the 2004- 05 fiscal year, General Fund revenues, ( tax and non- tax
revenues) came in $ 74.3 million higher than the $ 3.5 billion forecast for the period. A continuation of
the current trend would lead to revenue growth of 7.6 percent for the full year versus the 5.5 percent
economic growth rate built into the budget. However, an analysis of the collection detail reveals that
the improvement is not broad- based. Of the extra collections, $ 65.1 million came from one source,
corporate income taxes. While other taxes are also increasing, the net surplus from other revenues is
only $ 8.8 million. Additionally, $ 30 million of the extra corporate collections is the result of a one- time
settlement in August 2004 of a long- standing corporate tax dispute not directly related to the economy.
Also, $ 31.8 million of the corporate surplus came from a 33 percent rise in September 2004 payments.
This rise is in contrast to the 10.2 percent decline in June and the 2.7 percent drop in April ( April, June,
and September are major corporate collection months). Because of the volatility of the corporate
income tax, it will be difficult for the State to maintain this growth as higher interest rates and increased
energy costs impact the economy
Other taxes are increasing but at different rates. The withholding of individual income tax receipts
are $ 18.2 million behind schedule for the first quarter ( 4.6 percent growth versus budgeted rate of 5.7
percent). The primary factor is sluggish job growth. State and local sales tax collections rose by 8.2
percent for the July to September 2004 quarter versus the 6.1 percent projection for the period.
However, the rate of growth slowed to 6.7 percent for September from almost 10 percent in August.
The impact of recent hurricanes has taken a severe toll on certain areas of the State. The effect on
State and local revenues is hard to measure. In a typical disaster event, the front- end loss in
withholding and sales tax revenue is eventually offset by gains during the recovery period due to
reconstruction efforts and the makeup of lost production.
The improving revenue picture, though not as broad- based or as strong during prior recoveries, is
dampened by the State’s $ 1.1 billion structural budget gap for the 2005- 06 fiscal year. The gap is due
to a combination of tax increases that will expire ($ 525 million), one- time transfers used to balance the
2003- 04 and the 2004- 05 budgets, and one- time budget cuts. The budget gap numbers for North
Carolina are typical of other states following the severe 2001- 03 recession.
State of North Carolina 47
Conditions
Expected to
Impact
Future
Operations
The North Carolina Retirement System has identified major issues that will have a significant
impact on the State’s fiscal condition.
Demographic Factors: The Baby Boomers
The process of retirement for the demographic cohort known as the “ Baby Boomers” will have
tremendous economic, social, and political impact in North Carolina.
Two critical areas in which the “ Boomer” retirement will be significantly consequential are: A)
public sector workforce, and B) the cost to the State of providing retirement benefits.
Workforce Impact:
• The Baby Boomers are an eighteen- year cohort, currently between forty ( 40) and fifty- eight
( 58) years of age.
• In North Carolina this cohort constitutes approximately 59 percent of the State’s public
workforce. Impact: the State’s public sector workforce will have to be replenished as this
cohort moves into retirement.
• Further, replacement personnel will be drawn from a shrinking pool of workers made up of
considerably smaller generations than the boomer predecessors. Impact: the State will be
faced with an increasingly competitive labor market.
• Implications: North Carolina will have to address these impacts by one or more of the
following: expand its efforts to retain aging boomers in the public sector and thus slow the
rate of retirement, or become more competitive in the labor market in order to recruit
workers to State employment or reduce the number of public sector positions.
Providing Retirement Benefits:
• The first year of the eighteen ( 18) year boomer cohort has just reached the average age of
retirement in the State system for 2003, which is aged 58 ½ . Impact: the first of the Boomer
cohort is on the cusp of retirement, marking the beginning of boomer retirement from the
North Carolina public sector.
• The total number of retirees in the North Carolina Teachers’ and State Employees’ Retirement
System will increase 135% through 2022 ( the total increase for both the State and the Local
government systems is 141%). Impact: the cost to the State of providing retirement
benefits will increase. ( Note: Increasing costs are not driven by the cost of providing an actual
pension as employees and employers fund the pension over the employee’s service career. The
increase in cost will come from administrative expenses and the cost of providing Cost of
Living Adjustments ( COLAs) for a significantly larger retiree pool.)
• While a set rate for Cost of Living Adjustments ( COLA) is not specified in statute, the State has
historically provided retirees with an annual COLA that matches the Consumer Price Index
( CPI). Impact: if the State continues to provide a COLA to retirees, expenditures from
the General Fund will have to increase to cover the cost of providing such COLAs for an
increasing pool of retirees.
• Implications: to be competitive in tomorrow’s labor market, North Carolina will have to
continue to provide attractive benefits such as the State’s retirement plan; this will occur
during a time when system administration and COLAs costs will increase significantly as
the number of retirees exponentially expands.
Retiree Health Care
The Governmental Accounting Standards Board ( GASB) reporting guidelines that will require
disclosure of the State’s liabilities for retiree health care costs ( i. e., GASB Statements No. 43 and 45) is
one of the State’s largest looming fiscal items. The Retirement System facilitates the benefit by making
the deduction for the State Health Plan from retirees’ pension checks. The Retirement System is also
the front line organization for retirees who want to voice their concerns about changes, or potential
changes, to benefits. Ultimately, the provision of health care for the State’s public sector retirees is the
responsibility of the State Health Plan. The unfunded actuarial liability for retiree health care is
substantial because of the State’s policy of funding these benefits on a pay- as- you- go basis.
48 State of North Carolina
In preparation for the new GASB standards on other postemployment benfits, the North Carolina
General Assembly enacted legislation in 2004 establishing a Retiree Health Benefit Fund. The State’s
contributions to this fund are irrevocable, and the assets of the fund are not subject to the claims of the
State’s creditors. More detailed information about the State’s obligations for Retiree Health Care is
presented in the Letter of Transmittal.
In addition, the announcement of a new computer manufacturing facility by Dell, Inc. is expected to
impact future operations.
Dell Manufacturing Facility
In November 2004, Governor Michael F. Easley announced that Dell, Inc. ( Dell) will build a
computer manufacturing facility in North Carolina. Dell, a leading manufacturer and distributor of
computers and related products, plans to build and equip a state- of- the- art, 400,000- square- foot
manufacturing and distribution facility in the Piedmont Triad region. Dell currently has two U. S.
factories in Nashville, Tennessee and Austin, Texas. The North Carolina General Assembly convened a
one- day special session on November 4, 2004 an approved an economic incentive for computer
manufacturing companies that in the case of Dell, will provide up to $ 225 million in tax credits over the
next fifteen years. For each year in which Dell meets the required performance targets, the State will
provide a grant equal to 75 percent of the State personal income withholding taxes derived from the
creation of new jobs.
Requests for Information
This financial report is designed to provide our citizens, taxpayers, customers, and investors and
creditors with a general overview of the State’s finances and to demonstrate the State’s accountability
for the money it receives. If you have questions about this report or need additional financial
information, contact the North Carolina Office of the State Controller, Accounting and Financial
Reporting Section, 1410 Mail Service Center, Raleigh, N. C. 27699- 1410. In addition, this financial
report is available on the Office of the State Controller’s Internet home page at
http:// www. ncosc. net/ financial/ financial. html.
BASIC
FINANCIAL
STATEMENTS
50 State of North Carolina
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GOVERNMENT- WIDE
FINANCIAL
STATEMENTS
52 State of North Carolina
STATEMENT OF NET ASSETS
June 30, 2004 Exhibit A- 1
( Dollars in Thousands)
Primary Government
Governmental Business- type Component
Activities Activities Total Units
ASSETS
Cash and cash equivalents ( Note 3)................................ $ 4,105,858 $ 249,802 $ 4,355,660 $ 2,700,361
Investments ( Note 3)........................................................ 499,164 38,409 537,573 2,050,256
Securities lending collateral ( Note 3)................................ 3,426,369 193,909 3,620,278 —
Receivables, net ( Note 4).................................................. 2,051,983 297,705 2,349,688 735,038
Due from component units ( Note 17)................................ 18,202 — 18,202 55,833
Due from primary government ( Note 17).......................... — — — 276,402
Internal balances............................................................... ( 58) 58 — —
Inventories......................................................................... 150,730 485 151,215 69,786
Prepaid items.................................................................... 12,337 1,845 14,182 13,854
Advances to component units ( Note 17)........................... 24,242 — 24,242 —
Notes receivable, net ( Note 4).......................................... 282,678 435,220 717,898 2,890,667
Endowment investments ( Note 3)..................................... 55,211 — 55,211 1,715,044
Investment in joint venture................................................ — — — 8,319
Deferred charges.............................................................. — 118 118 20,661
Securities held in trust....................................................... 41,638 — 41,638 —
Pension assets ( Note 11).................................................. 278 — 278 —
Capital assets- nondepreciable ( Note 5)............................ 9,947,437 27,096 9,974,533 1,608,640
Capital assets- depreciable, net ( Note 5)........................... 15,609,459 22,411 15,631,870 5,068,825
Total Assets ..................................................................... 36,225,528 1,267,058 37,492,586 17,213,686
LIABILITIES
Accounts payable and accrued liabilities.......................... 1,239,924 24,067 1,263,991 549,345
Medical claims payable..................................................... 762,427 — 762,427 7,308
Unemployment benefits payable....................................... — 20,048 20,048 —
Tax refunds payable.......................................................... 1,056,880 — 1,056,880 —
Obligations under securities lending................................. 3,426,369 193,909 3,620,278 —
Interest payable................................................................. 57,931 35 57,966 24,201
Short- term debt ( Note 6)................................................... — 251,759 251,759 2